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Operator: Good morning or good afternoon, and welcome to the Vince Q3 2025 Earnings Conference Call. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the floor to Akiko Okuma to begin. So please go ahead whenever you are ready. Akiko Okuma: Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp., Third Quarter Fiscal 2025 Results Conference Call. Hosting the call today is Brendan Hoffman, Chief Executive Officer; and Yuji Okumura, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. Discussions of these non-GAAP measures and information on reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investors section of the company's website at investors.vince.com. Now I'll turn the call over to Brendan. Brendan Hoffman: Thank you, Akiko, and good morning, everyone. We are extremely proud of our third quarter performance as we drove healthy sales growth across all channels and exceeded our expectations for both top and bottom line. Our assortments are resonating across both our women's and men's businesses. But most encouraging is the acceptance we have seen to the strategic price increases implemented this quarter as well as in the momentum in our DTC segment, given the enhancements we have made to the customer experience. In our women's assortment, which has the highest impact from tariffs, prices increased more than our overall average increase of approximately 6%, but units were nearly flat to last year, validating the quality and value of our product in the marketplace. Beyond the pricing actions, our teams have done an exceptional job in continuing to manage the evolving tariff environment. Our goods are flowing smoothly despite significant changes in sourcing and importantly, we've maintained our quality standards throughout this transition. With respect to customer experience, following the store renovations from earlier this year, we enhanced our e-commerce site in Q3 with a strategic site refresh, increased marketing support and the launch of dropship. Our e-commerce site refresh elevated the customer experience with more modern, creative elements and enhanced site merchandising. We are now using AI-generated video content to enrich product detail pages and introduce more service elements like our Cashmere care guide. This investment in our digital platform contributed meaningfully to our strong performance, and we're seeing the benefits flow through in both conversion rates and average order values. Our e-commerce site also significantly benefited from the marketing investments we made in mid-funnel marketing this quarter. Through this work, we grow triple-digit growth in site traffic late in the quarter and supported full price new customer acquisition as well. And at the end of the quarter, we went live with a new dropship strategy, which we believe will be a significant growth opportunity for us moving forward. In the first month since launch, we have seen significant increase in volume. Our initial launch focused only on shoes, but we have plans to expand to other categories, capitalizing on our partnership with Authentic Brands and the category expansion opportunities that provides. The dropship strategy allows us to not only offer more fashion-forward products that we might typically feel comfortable procuring directly, but enables us to showcase a more diverse assortment to our customer providing learnings on customer preferences that we may incorporate into our store channel as well. In addition to these initiatives, we opened 2 new stores this quarter in Nashville and Sacramento, following our successful store opening in Marylebone, London earlier this year, which continues to exceed our expectations. Moving to our wholesale business. We delivered solid growth versus last year, with some of this reflecting the timing benefits from the Q2 shipment delays that we discussed previously, as well as ongoing performance of key partners. We were excited to recently celebrate our 2025 holiday collection, along with our continued partnership with Nordstrom with an immersive experience in L.A. with Nordstrom's top clientele, Nordstrom's VP Fashion Director; and our Creative Director, Caroline Belhumeur. It was a great event to kick off the holiday season and highlight our holiday campaign, which celebrates our brand spirit and showcases connections through stories and gift giving with a 360-degree omnichannel strategy. Thus far, we have seen a very strong start to the holiday quarter, including record sales across the Black Friday and Cyber Monday weekend in our direct-to-consumer business. Given the strength of Q3 and the momentum we are continuing to drive, I am more confident than ever in the trajectory ahead for Vince Holding Corp., and the prospects we have to leverage our platform further to drive growth. We continue to successfully navigate the tariff challenges while maintaining the quality and brand integrity we are known for. We are beginning to reinvest in the business, particularly in marketing initiatives that we had pulled back on earlier in the year and we're seeing positive returns on these investments. The underlying fundamentals of our business remain strong. We're operating with disciplined execution, while positioning for growth. With that strong foundation and the momentum we're building, I'll now turn it over to Yuji to discuss our financial results in more detail and provide our updated outlook. Yuji Okumura: Thank you, Brendan, and good morning, everyone. As Brendan reviewed, we are very pleased with our third quarter performance as we saw momentum continue across the business, enabling us to begin to reinvest in key areas of the business. Total company net sales for the third quarter increased 6.2% to $85.1 million compared to $80.2 million in the third quarter of fiscal 2024. With respect to channel performance, our wholesale channel increased 6.7% and our direct-to-consumer segment increased 5.5%. As Brendan reviewed, part of the growth in wholesale reflects the timing of shipments, given the delays we experienced earlier in the year with tariff disruption. Our teams are doing an excellent job and continuing to manage our supply chain and our goods are flowing smoothly and expect to be back in line to normal course timing by the spring. Gross profit in the third quarter was $41.9 million or 49.2% of net sales. This compares to $40.1 million or 50% of net sales in the third quarter of last year. The decrease in gross margin rate was primarily driven by approximately 260 basis points due to the unfavorable impact of higher tariffs and approximately 100 basis points due to increased freight costs partially offset by 140 basis point increase due to favorable impact of lower product costing and higher pricing and approximately 110 basis points due to favorable impact of lower discounting. As Brendan reviewed, we are very encouraged by customers' response to our strategic price changes and our team's ongoing focus on tariff mitigation efforts. Given timing and mix of sales, we experienced less of a headwind than originally expected from tariffs during the quarter but expect these costs to ramp into the Q4. Selling, general and administrative expenses in the quarter are $36.5 million or 42.8% of net sales as compared to $34.3 million or 42.8% of net sales for the third quarter of last year. The increase in SG&A dollars was primarily driven by approximately $1.1 million related to compensation and benefits and $760,000 of increase in marketing and advertising costs as we reinvested into mid-funnel activities. Operating income for the third quarter was $5.4 million compared to operating income of $5.8 million in the same period last year. Net interest expense for the quarter decreased to $1 million compared to $1.7 million in the prior year. The decrease was primarily due to lower levels of debt under our term loan credit facility. At the end of third quarter of fiscal 2025, our long-term debt balance was $36.1 million, a reduction of $14.5 million compared to $50.6 million in the prior year period. Income tax expense was $2 million compared to 0 income tax provision in the same period last year. The increase is due to the impact of applying our estimated annual effective tax rate to the year-to-date ordinary pretax income. In the prior comparative period, we had a year-to-date ordinary pretax losses for the interim period, and as such, we did not record any tax expense for the same period last year. As a reminder, following the change in controls that earlier this calendar year, we have limitations to use of the NOLs that we did not have last year also impacting the cash tax expense comparison to previous years. Net income for the third quarter was $2.7 million or income per share of $0.21 compared to net income of $4.3 million or income per share of $0.34 in the third quarter of last year. The year-over-year decline in net income was driven by the increase in tax expense. Adjusted EBITDA was $6.5 million for the third quarter compared to $7.4 million in the prior year. Moving to the balance sheet. Net inventory was $75.9 million at the end of the third quarter as compared to $63.8 million at the end of the third quarter last year. The year-over-year increase was primarily driven by approximately $4.2 million higher inventory carrying value due to tariffs. Turning to our outlook. As Brendan discussed, we have seen a very strong start to the fourth quarter with a record holiday weekend sales performance in our DTC segment. Our outlook for the period assumes that this momentum continues with the growth in DTC segment expected to outpace our total net sales growth for the period, which is expected to increase approximately 3% to 7%. This guidance also takes into account potential shift in timing with respect to wholesale shipments given end of the year seasonality. In addition, we expect adjusted operating income as a percentage of net sales for the quarter to be approximately flat to 2% and for the adjusted EBITDA as a percentage of net sales to be approximately 2% to 4% compared to 6.7% in the prior year period. Our guidance for the quarter takes into account approximately $4 million to $5 million of estimated incremental tariff costs that we continue to expect to partially offset with our mitigation strategy. Given our year-to-date performance, and our outlook for the fourth quarter, we expect full year net sales growth to be approximately 2% to 3%. Adjusted operating income as a percentage of net sales to be approximately 2% to 3%, and for the adjusted EBITDA as a percentage of net sales to be approximately 4% to 5% compared to 4.8% in the prior year period despite incurring approximately $8 million to $9 million of incremental tariff costs compared to last year. This concludes our remarks. And I'll now turn it over to the operator to open the call for questions. Operator: [Operator Instructions] And our first question comes from Eric Beder at SCC Research. Eric Beder: Congratulations on a great Q3. I want to talk a little bit about some of the potential drivers here. So you have just started to roll out some of the licensed product, we've seen handbags and suiting in our store tours. I'm curious, you mentioned it also in your comments, where do you think that goes? And I know that the tariffs kind of slowed down the rollouts. What should we be thinking about the potential for that in 2026 and beyond? Brendan Hoffman: Well, I think it's -- I'm even more bullish now after the last month based on my comments on dropship. So what we saw with dropship with Caleres and shoes in the last 4 or 5 weeks, is truly spectacular. And so the opportunity to launch that on e-commerce in the spring on these other categories and then figure out how to better utilize that within the stores, in addition to obviously showcasing the product I think it has -- it can have a real impact on our business more than I was anticipating prior to the dropship launch. Eric Beder: And when you look at -- I know that you've been also looking at putting -- you put some COH denim into some of the stores. How should we be thinking about that potential opportunity to kind of collaborate with other our key fashion brands to kind of help both of you? Brendan Hoffman: Yes. That's something that we're going to continue to explore and prioritize. Very happy with the Citizens of Humanity collab. It also highlights the opportunity we have in denim. So whether we do that in-house, although that's a long haul or continue to do partnerships in denim with Citizens and look for other categories that perhaps ABG isn't licensing at this point. And we can bring to kind of round out our assortment. So that was another good win for Vince. Eric Beder: Great. And you opened up 2 new stores in new markets. I know it's very short. Could you give us a little bit of thought process? And then kind of what should we be thinking about -- I know that we pulled back on that a little bit this year just because of all things going on this year. But given the results here, what is the store opportunity kind of back on full swing for next year and going forward? Brendan Hoffman: Yes. I mean we're pleased with the way the Nashville and Sacramento have been received within the community. It's still early days. Also, we'll be monitoring what it does to our e-commerce business. I think we have 60 stores now between the outlets and full price. And I wouldn't expect that number to move much, maybe a couple more, a couple less depending on opportunities. We continue to be really pleased with our Marylebone store in London. So I'm going to see if there's opportunities in other parts of Europe, both to do business where we can be profitable like Marylebone and also provide some visibility for us in regions where we have a wholesale business and stores can just reinforce that. So we'll continue to monitor the direct-to-consumer opportunity led by e-commerce. But as I've always said, it's not an either/or with direct-to-consumer and our wholesale business. It's both. It's an and. And I think they just reinforce each other, and we saw that in Q3 and continue to see that in Q4. Eric Beder: Great. Congrats and good luck for the rest of the holiday season. Operator: The next question comes from Michael Kupinski from Noble Capital Markets. Michael Kupinski: And I'd like to offer my congratulations as well. Sales were obviously much better than what we were looking for. Were there any particular bottlenecks or limitations that could have delivered even better sales? And I'm thinking any inventory constraints for particular items, for instance? Brendan Hoffman: I mean, there's never a crystal ball. So you always -- there are certain things you wish you had a little bit more. But I think overall, we were in a good inventory position. Really working through the first half of the year, disruption from tariffs as we discussed. So as I'm doing my store tours, I'm not getting too much pushback from the stores about where they need more inventory. I think Vince also since I was here last, is doing a much better job with our logistics and operations, refilling the stores on a timely basis. So I think we have a good handle on that. Again, not to harp on it, but I am so excited about it, this dropship opportunity, which allows us to take full advantage of Caleres' shoe inventory. I mean that's a big deal because that's where we did have some holes in our inventory assortment because it's a little bit more difficult with our third-party partners to properly procure ahead of time. So this opens up a really big opportunity for us going forward, as I've been saying. But overall, the inventories, I think we're in a good position and help fuel the growth we saw. Michael Kupinski: And how much of the strong revenue growth was driven by price versus product volume? I know that you touched on that in your comments, but I was wondering if you could just expand on that. Brendan Hoffman: Yes. Well, I mean we are really pleased that the units held steady and actually grew at the higher price points. So we had anticipated given the price changes that we would see a little bit of erosion in our unit velocity. But so far, we haven't seen that. And the customer seems to be trading up with us. I don't know if that's because they're trading down from other luxury brands. And as those prices skyrocket, but our core customer continues to see us as a value. And as I said in my comments, women's was where we had to take the largest price changes. And the units held strong. So it was a win-win, and that's continued into all of it. So we'll continue to monitor that, continue to see if there's even a little bit more opportunity to push up price where we think the customer will react positively. But definitely a driver was the strength in the units. Michael Kupinski: And then given that wholesale and direct-to-consumer looked like revenues were -- the revenue growth were pretty much similar. But I was wondering if there was any divergence between the 2 channels in terms of product sales and particularly as you go into the fourth quarter. Brendan Hoffman: No. I mean we -- our e-commerce was clearly the big winner and driver when you look across all the channels. But overall, saw strength at the register with our wholesale partners. We continue to work with Saks Global to make sure that we're able to properly service their business while they go through their transformation. So that creates a little bit of noise. But overall, as we start December, the product is checking at the register everywhere. Michael Kupinski: Got you. My final question is, can you just talk a little bit about trends in freight costs. I know that I was just wondering if you negotiate annual contracts. And if you could just talk a little bit about what you're seeing there. Yuji Okumura: Yes, certainly. So yes, we are seeing freight cost increases. That's also partially due to the fact that we are changing sources as well of where we are sourcing the product. So it's really more the product of -- depending on the shift in timing, we're airing more stuff or certain pieces are taking longer in terms of distance wise to get here. So it's not so much of the actual inherent sort of freight contracts and the pricing related to that. It's really more along the lines of the timing of when we want to bring in the product, which method we're using to bring in the product. Operator: [Operator Instructions] We have no further questions so I'll hand the call back to the management team for any closing comments. Brendan Hoffman: Okay. Well, thank you all again for your participation today, and we look forward to updating you on our year-end results in the spring, and happy holidays to all. Thank you. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: Greetings, and welcome to the Constellation Brands Q3 Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Blair Veenema, Vice President, Investor Relations. Please go ahead, Blair. Blair Veenema: Thank you, Kevin. Good morning, all, and welcome to Constellation Brands' Q3 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides made available in the Investors section of our company's website, www.cbrands.com. On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call. Before turning the call over to Bill and Garth, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and over to your questions. Operator: [Operator Instructions] Our first question today is coming from Bonnie Herzog from Goldman Sachs. Bonnie Herzog: Hope you're doing well and happy New Year. I guess I had a question on your beer op margins. They came in a lot stronger than expected in the quarter despite the volume deleverage. So hoping you could talk further on some of the puts and takes behind this strength. And then thinking about your full year guidance, which you maintain, it does imply much more modest beer op margins in the fourth quarter, which I know seasonally is a lower quarter. But is there anything else that is expected to weigh on margins in this next quarter? Maybe aluminum, or if you could just talk through that? Garth Hankinson: Thanks for the question, Bonnie, and happy New Year to you. So first starting with Q3 margins. As you indicated, volume declines certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics and then brewery maintenance. Offsetting those headwinds, we continue to make good progress against our cost savings initiatives. We had favorable pricing from the actions we've taken in both the spring and in the fall. And then there was a depreciation timing benefit that occurred in Q3, which was favorable on a year-over-year basis. As we think about -- or move to Q4, just to underscore what you said, it is our lowest quarter from a seasonality perspective, makes up about 20% of our overall volume. So fixed overhead absorption will be most amplified in this quarter. The depreciation benefit that we saw in Q3 will actually turn into a little bit of a headwind into Q4 as additional assets come online or are put into service. And then tariffs will be a further headwind in Q4, really related to a couple of factors, one of which you mentioned, which was aluminum and the pricing of aluminum which continues to be pretty strong. There is also the ongoing and as expected shift in product mix, so more to aluminum, from glass, and we'll see that in Q4. And then there's also a timing element to tariffs as to when the tariff gets accrued and goes into inventory and then when it gets released in the P&L. And that will be a bit of a headwind in Q4 as well. Operator: Next question is coming from Nadine Sarwat from Bernstein. Nadine Sarwat: Another one on beer margins, though perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release and in your answer just now about the pressures that beer margins will face in Q4. So with that in mind, how should we be thinking about the 39% to 40% beer margins for fiscal '27 and '28 that you guided to back in April of last year? Is that something you still believe you can achieve? Should we be thinking of margins closer to where we were this year? Any color would be helpful. And then if I could just squeeze in one more on depletions. Nice to see that come in, I think, ahead of some expectations. Any color on exit rate or what we're seeing in December? Is there any sequential improvement or more of the same? Garth Hankinson: Thanks, Nadine. I'll take the first question and then Bill will take the second. But as it relates to FY '27 and beyond, as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY '27 and beyond in our April earnings call. That's our normal cadence, if you will. It allows us to see how the rest of the year unfolds from a consumer perspective and from a macroeconomic perspective as well. So more to come on that. That being said, the guidance that we provided last April was given under a different set of macroeconomic conditions, and the macroeconomic environment has worsened since that time. So that will all go into our planning process and will be reflected in the guidance that we give in April. William Newlands: And, Nadine, relative to December, December came in roughly where we expected. It was fairly consistent with our expectations. For those of you who track the Circana/IRI data, you saw there was a very strong result against our business around the Christmas holiday. Noting, of course, that that's a great reflection of the strength of our overall brands and the brand health that exists for our brands. And therefore, we were quite comfortable coming out of December as the first month of our last quarter of the year. Operator: Next question is coming from Lauren Lieberman from Barclays. Lauren Lieberman: Want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million additional hectoliters of capacity through fiscal '28. I think that implies sort of heavier CapEx in 4Q tied to Veracruz. I just wanted to maybe get an update on how you're thinking about the modular capacity build-out over the next couple of years, managing that against growth projections to support kind of what are really the optimal utilization levels. And particularly, when we think about the fiscal '26 volumetric pace is going to be lower than what you kind of originally thought back in April, to your point, under a very different macro backdrop. Garth Hankinson: Yes. Lauren, thanks for the call. So the approach on the modularity of the breweries is we'll continue with that approach going forward. As we've said over the course of the last couple of quarters, the way we'll manage that really is -- when we bring assets online, and we'll manage to bring -- or we'll manage through the capacity in that manner. What we've also said, though, is that when you're building capacity in a manner which we've been building capacity with long-lead items, you are making commitments to that spend. And our plan for this year is reflective of commitments that we've made on capacity expansion. But, again, we continue to monitor this and assess where the volume is expected to be. And, again, we'll bring the assets online when we can. And to the extent we can delay or defer CapEx, we will. But there's a lot of long-lead equipment that goes into a brewery, and those commitments have been made. Operator: Next question is coming from Rob Ottenstein from Evercore ISI. Robert Ottenstein: Great. Moving more to -- over to the brand side. The Pacifico brand has been an extraordinary success. It's still relatively small, but you've been working on it very diligently for 10-plus years or so. Just wondering how -- what you've learned about the brand over this time, how incremental is it, any tweaks that you see in terms of the brand positioning and the pressure -- the marketing pressure, investment pressure behind the brand for it to kind of get to what you think is its full potential, which my understanding is, is to be a very strong #3 brand in your portfolio. William Newlands: Yes, Robert. Pacifico, obviously, has been a tremendous success to date, much in the same way that Modelo initially developed in the west of the United States and then has progressively moved east to become the #1 player by dollars in the United States. Pacifico is doing a very similar approach. It's the #2 brand in the State of California today. It skews younger relative to our overall portfolio and really has resonated well with consumers. As you know, it's the #1 social -- #1 on social media in terms of share of voice, and it has gained 1.5 points in the on-premise. So you're seeing significant gains in that arena as well. So we continue to invest behind this brand. As you point out, we think it's going to be a strong #3 in our portfolio as time goes forward. And you should expect to see us continue to put significant emphasis on this as it builds its way across the country, similar to what Modelo did several years ago. Operator: Next question is coming from Dara Mohsenian from Morgan Stanley. Dara Mohsenian: So you mentioned mid-single-digit distribution growth for the beer portfolio in the quarter. Just as we look out to calendar 2026 post the spring resets, do you think it's realistic you can drive shelf space gains for your portfolio with macros where they are? Or is that less realistic just given the weaker velocity we've seen over the last year or so? And maybe also you can just touch on the beer category itself and what you're hearing from retailers as we think about shelf space for the category in the balance of 2026. William Newlands: Sure. Let's start with the distribution side. We continue to see distribution as one of our strongest opportunities going forward. Given that our portfolio gained share in 49 of the 50 states, we continue to earn additional distribution capability and distribution positions across the country. Now those will probably change some. You've seen a radical increase in distribution around Pacifico, going back to Robert's question a moment ago, as well as Victoria, which also has grown double digits for the most recent past. So we continue to see distribution as a significant opportunity going forward. Remember, Modelo itself, despite the fact that it's the #1 beer by dollars in the U.S., it still has 20% fewer PODs than the broader domestic players who we compete against. So there remains plenty of opportunity for distribution to be an important part of the future. That has been reemphasized by our Shopper-First Shelf, which has allowed retailers to recognize the opportunity to build a stronger section. And that will be a significant part of your category question, is as more people do Shopper-First Shelf, it will be better for the category and, as you would expect, on brands that are growing their share like ours are, it will be good for us as well. Relative to the beer category overall, it still remains challenged. And it's largely around the Hispanic consumer. 75% of the Hispanic consumers are very concerned about the socioeconomic environment and they're being much more careful about their spending patterns, spending much more on what you would call consumer essentials versus other categories. So I think that's going to continue to be volatile going forward. But this is where our focus remains on controlling the controllables, and that is distribution, that's price pack architecture, that's doing the right things to set ourselves up for a successful future. Operator: [Operator Instructions] Our next question is coming from Drew Levine from JPMorgan. Drew Levine: I wanted to follow up, again, on the beer margins implied for fourth quarter given the low single-digit absolute COGS increase for the year. Implies gross margins, I think, something in the 47% range. I understand that it is lower volume as, Garth, you well mentioned. But I guess maybe if you could sort of provide a little bit more context on the expected headwind from aluminum and depreciation that you mentioned, any sort of quantification there? I'm just asking because, I guess, last year in fourth quarter, volumes were down as well and, obviously, much stronger margin performance. So just on the margins, that would be great. And then another follow-up just on the depletions in the off-premise, I think were down 2.9%, ran decently ahead of where we saw both Nielsen and Circana end up in the third quarter. It's the second quarter in a row that's happened. So wondering what you're seeing in the independent channels, if it's just sort of a function of easy comparisons, or are you seeing any sort of encouraging trends in that channel? Garth Hankinson: Yes. So just to reiterate on the margins, what the headwinds were and, again, you noted that it is our low seasonal quarter. Just for clarity, again, it's 20% of our overall volume for the fiscal year. As I mentioned, depreciation, which was a benefit for us in Q3, will be an incremental headwind in Q4 because incremental assets are being placed into service. So that will be a headwind in the quarter. And then on tariff, as expected with tariffs, aluminum pricing has gone up, so the tariff has gone up. There's been an ongoing shift in our business, in our portfolio towards aluminum. That's continued through the fiscal year, right? So we'll see the impact of that in Q4. And then there is a timing element around tariffs, which is you incur the tariff when you bring it into the U.S., but then it doesn't run through your P&L until you sell it on. And so given the way tariffs have layered in through the year, there's going to be a higher tariff impact as expected in Q4. Another minor impact, headwind in Q4 is there were some expenses that we expected to incur in Q3 that had pushed into Q4. That's just timing. So a bit of a benefit in Q3 versus a headwind in Q4. William Newlands: Relative to your question related to depletions, I think a couple of things to keep in mind that you don't always see. Some of the regions have less tracked channel coverage, and those have been stronger, on-premise. A year ago, Modelo was #5 on draft, today it's #2. I already mentioned when I was answering Robert's question on Pacifico that we picked up significant share with Pacifico in the on-premise as well. So some of those areas that are not as easily tracked have gone in our favor, and that certainly has helped the depletion layout versus what some of the expectations were. Operator: Next question is coming from Gerald Pascarelli from Needham & Company. Gerald Pascarelli: Question for Bill. Just despite the continued macro pressures, your depletions have remained relatively consistent this year, just kind of down 2.5% to 3%, so not getting materially worse. Your beer business continues to outperform the category. It looks like scanner showed a little bit of an improvement in December. So just curious how you're thinking about a potential recovery, if at all, in your beer business looking out over the next year when you just consider some of the obvious tailwinds, the easier compares, the benefit of the World Cup, those types of things. Any color there would be great. William Newlands: Sure. Obviously, we're cautiously optimistic that we're on the sort of the plateau of where the business will be. But it's been really tough to judge. The volatility has been great. What -- so it's very hard to say that you've sort of hit the bottom. When you look at our omnibus study, we continue to see Hispanic consumers being particularly concerned. There seems to have been a little bit of uptick with the broader market community. And as I alluded to earlier, Christmas week was particularly strong for our business. But I think that's more reflective of when consumers are coming out and they're buying. They continue to buy our brands because of the brand health of those brands. There are some things, as you point out, next year, World Cup is a great example, where there will be things that are beer moments. And certainly, we believe our beers will help to support those beer moments. But it's very difficult to project at this point how this is all going to go. A lot of it is going to relate to what the -- how the consumer is feeling and how they're feeling about the sort of macroeconomic issues that exist today. Operator: Next question today is coming from Robert Moskow from TD Cowen. Robert Moskow: Thanks for the question. Unfortunately, it was also Gerald's question. But maybe if there's a way to think about it just quantitatively, your Hispanic consumer really started feeling the pressure in February of last year. You kind of see it in the data. And I guess what we're all kind of wrestling with is, once we lap that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? So instead of mid-single-digit declines just theoretically with this cohort, since you're lapping the initial shock, it could be a little bit better than that? William Newlands: Well, we hope -- we assume that you -- we hope you're correct. That would be a lovely outcome. The thing that we consistently see, and as you know and we've said this in prior quarters, we track it by ZIP code. And with ZIP codes that have greater than 20% Hispanic representation, it still remains very challenging. That has seen some improvement in ZIP codes with less than 20% Hispanic representation, and you see a lot of volatility state by state depending on what is going on with immigration policy in particular markets. So all of those factors have been why it's been very difficult to predict, because you do have that volatility that goes on state by state, market by market. It's why we continue to talk about controlling the controllables. It's why we continue to talk about and put ourselves in a good position to win. It's why we have focused on the things that are working in our favor, things like Pacifico and Victoria, Modelo Draft, Corona Sunbrew, Corona Non-Alcoholic, all of which are working very well against our business and are positioning us not only to have near-term success, but for the long run as well. Operator: Next question is coming from Filippo Falorni from Citi. Filippo Falorni: Happy New Year. I wanted to ask on the beer pricing environment. You had 1.5% pricing in the quarter, but you have also some negative mix from package types. Can you discuss like how you're thinking that would evolve going forward? Should we still think this dynamic continues? And then maybe if you can touch on like some of the initiatives that you did with Modelo Oro and Corona Premier in terms of the price adjustments. Are you seeing a volume uptick as a result of the price adjustment there that could we see some more -- in some more other brands to try to respond to the macro environment? William Newlands: Sure. We continue to project 1% to 2%. We still think that's an appropriate level. As you know, it will vary higher or lower within that range depending on the market conditions that we face. But to your point, we are quite pleased with the initial work. As many of you know, during this past -- or this past calendar year, we adjusted Oro and Premier pricing to be more in line with the average price point the consumer was expecting for light beers. We're very pleased with what that looks like. Our trends on Oro and Premier have both improved, and we're pleased with that positioning. It also points to price pack architecture, which is also an important part of what we have done. We have added 7-ounce in a number of forms and formats in different states to, again, meet the needs of consumers who are concerned about price points because of their socioeconomic concerns and financial concerns that exist at the moment. Again, all of those things are trying to meet the consumer where they are today, and that process will continue going forward. Operator: Next question is coming from Peter Galbo from Bank of America. Peter Galbo: I maybe just wanted to ask a clarifying comment from your prepared remarks about the fourth quarter specifically. You talked about an expectation of year-over-year volume declines in the beer business to improve, I think, in the first sentence. And I just -- I wanted to clarify whether that is a shipment comment, a depletion comment, both potentially, but that we should still be expecting kind of a negative in the fourth quarter and whether it applies to both ships and depletes in beer. William Newlands: Garth will add on to what I'm about to say, but as we've made note -- we made note in our last quarter, we expect over the course of the last 2 quarters that ships and depletes will be basically equal. As you saw, there was some minor variation in this quarter. You would expect that to probably reverse itself next quarter. But over the course of the 2, third and fourth quarters, we expect depletes and ships to basically be exactly the same. Anything you want to add to that, Garth? Garth Hankinson: Bill, that's precisely right. And the comment was specific to billings, so to your point, yes, so that the second half of the year billings and depletions are largely aligned. Operator: Next question is coming from Bill Kirk from ROTH Capital Partners. William Kirk: So a different type of question. In December, President Trump signed the executive order pushing to reschedule cannabis. I guess if that happens, how would it impact how you think about your exposures to that segment? And then on the ban on intoxicating hemp and intoxicating hemp beverages, in some states, those have become kind of a real market. Do you think you'll benefit if those products go away, those intoxicating hemp beverages go away? William Newlands: Obviously, we have shares in Canopy that we still have available to us. And I think that could ultimately be interesting as that market develops. But we don't engage on a day-to-day basis in the cannabis business today. I think -- we have not seen a significant issue related to our beer business related to hemp. It has mostly been around ready-to-drink and ready-to-serve scenarios where there seems to be interaction there, and that seems to be where most of the interaction has come. But admittedly, consumers make choices around their disposable income and what -- where they choose to spend money. And therefore, as this develops, that's certainly something that we're going to be quite aware of and keep our eye on closely. Operator: Next question is coming from Michael Lavery from Piper Sandler. Michael Lavery: I was wondering if you could maybe just elaborate a little bit on how to think about World Cup. It's, as you pointed out, just a driver of occasions. But have you -- can you give a sense of maybe what you've seen in the past in terms of maybe a positive lift, or any changes to your spending approach? I realize you're not a sponsor. So do you still plan some ways to kind of spend additionally around it or just kind of benefit from the occasion momentum? How should we think about just what impact that might have both on the top line side and maybe your spending side? William Newlands: Sure. As you would expect, this is a big sporting element for the coming year. Sporting elements tend to be big beer moments. It's also a sport that overindexes in the Hispanic community. All of those things, therefore, overindex into our business. So we would expect, as the consumer engages with that event and the various games that will attest to those, that will have some incremental benefits for us. We will remain as diligent as we always are to get the right promotions and to get the right shelf presence and floor presence around that particular time. We'll also have in-game media, TV media. As you know, Modelo is the #1 share of voice and Corona is the #3 share of voice in traditional media. All of that will be done consistent with investing against sports, which has been the focus of our attention anyway. So we believe that has an -- that creates an opportunity for a strong window of time for beer generally and more specifically to us. Operator: Thank you. We've reached end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal 2026 third quarter and year-to-date results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 third quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com. Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig? Craig White: Thank you, Alan, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on our sales and marketing, and then I will provide an update on our plans for fiscal 2027. During the third quarter, we completed the sale of our Hilti Complex, which was a big achievement for the company and our shareholders. Selling the complex saves -- paves the way for us to move forward into fiscal year 2027 with no bank restrictions, which allows us to execute our strategy to return to growth and profitability. Our plan is not an overnight change with expected immediate results, but a carefully developed strategy for long-term growth. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan O'Keefe: Thank you, Craig. Third quarter financial summary compared to the prior year third quarter, net revenues were $7 million compared to $11.1 million. Average active brand partners for the quarter totaled 5,100 compared to 12,400. Earnings before income taxes were $10.6 million compared to a loss of $1.1 million in the third quarter last year. Excluding the building gain from the sale of $12.2 million, our loss before income taxes would have been $1.6 million. Net earnings totaled $7.8 million for the quarter compared to an $800,000 loss in the third quarter last year. Earnings per share totaled $0.91 compared to a loss of $0.10 on a fully diluted basis. Year-to-date summaries compared to the prior year, net revenues of $18.7 million compared to $27.6 million. Average active brand partners totaled 6,200 compared to 13,300. Our earnings before income taxes totaled $7.4 million compared to a loss of $5.3 million last year. Excluding the building sale gain of $12.2 million, our loss before income taxes were $4.8 million. Net earnings totaled $5.4 million compared to $3.9 million loss last year. Earnings per share totaled $0.63 compared to a loss last year of $0.47 on a fully diluted basis. Now for an update on our working capital. Inventory levels decreased from $44.7 million at the beginning of fiscal year 2026 to $39.1 million at the end of November, generating $5.6 million of cash flows from inventory reductions. This cash flow has been used to pay down vendors, reduce our bank debts and fund our operational losses. In October, following the building sale, we paid off our line of credit, our term loans with our bank, Bank of Oklahoma. At the end of the quarter, we had $3.4 million of cash, $800,000 of receivables, $39.1 million of inventory and $2.0 million of accounts payable and $0 owed to our bank. That concludes the financial update. Now I'll turn the call over to Heather Cobb for a sales and marketing update. Heather? Heather Cobb: Thank you, Dan. One of the most significant milestones this quarter was the launch of Gathered Goods, our reimagined fundraising program. This program represents a meaningful shift in both strategy and execution. Unlike our previous Cards for a Cause fundraiser, Gathered Goods features custom products designed and created in-house, allowing us to better control quality, storytelling and brand alignment. From a financial perspective, this also delivers stronger margins, which is increasingly important in today's cost-sensitive environment. Equally important to this project was the online opportunity embedded within the program. Gathered Goods allows individuals and organizations to fundraise digitally, expanding reach beyond a single event or community and making participation easier for the supporters. While still early, this program positions us well for scalable, modern fundraising and opens the door for broader participation in future quarters. This quarter also included our Black Friday, which we call Book Friday promotion, a large site-wide sale that continues to be a cornerstone of our Q3 marketing strategy. Book Friday drove strong engagement across customers and brand partners, reinforcing the value of our catalog and our ability to generate excitement through well-timed broad-based promotions. While discount-driven events are not our priority or preferred strategy, this sale remains an important visibility and volume driver in the midst of the holiday season. Turning to the results themselves. While the decline in brand partner count is significant and clearly reflected in the top line, it's important to look at what the data tells us beneath the surface. First, the drop in revenue is not proportional to the decline in brand partner count. This tells us that the brand partners who remain active are, in fact, more productive and more engaged than in recent years. We are seeing fewer casual or inactive participants and a higher concentration of truly active sellers. Second, when we look specifically at our leader levels, the decline is not occurring at anywhere near the same rate as the overall field. Historically, leaders are our most loyal group. They are the ones who persevere through challenging cycles, adapt their approach and continue building even when conditions are not ideal. Just as important, leaders are also the primary drivers of new brand partner recruitment. Their relative stability gives us confidence that while the field may be smaller today, the foundation for future growth remains intact. In summary, this quarter reflects a business in transition, smaller in size, but more focused and more resilient. We are investing in programs like Gathered Goods that improve margin quality and scalability, maintaining strong seasonal promotional moments and seeing encouraging signs that our sales force is highly engaged and leader-driven. As we look to the future, the combination of a committed leader base, more productive brand partners and strategic program innovation gives us reason to be optimistic about the path ahead. Craig, I'll turn it back over to you. Craig White: Thanks, Heather and Dan. As Dan mentioned, with the closing of the building sale, we paid off all of our bank debts, which will have a positive impact on our cash flows of approximately $1 million per year. While the last couple of years have been challenging to operate our business under the restrictions from our bank, I'm excited about the position we are in today and the plan for growth in fiscal 2027 and beyond. Since fiscal 2024, we have had to prioritize cash. While we need to execute on a plan that increases sales and therefore, cash, we are putting more focus on increasing our brand partner counts. Our actions necessitated by the bank's restrictions have given red flags to our sales force, and they have been anxious and waiting to see what would happen. A major factor for the reduced activity has been the lack of new products for them to get excited about and therefore, share with their customer base. As we got closer to closing on the sale, we put together a reorder and new title purchase plan in conservative phases. We were ready to act on Phase 1 within a few days of closing and placed reprint orders on some key out-of-stock items as well as several new titles that we expect will energize our customers and sales force, giving our brand partners another item to help build momentum. We are excited about the arrival of those titles beginning in late spring and early summer. Another key component to attracting new brand partners is a refreshed marketing strategy. We know we need to adapt to what the next generation entering the workforce, Gen Z, is seeking in a business opportunity. These would be tweaks to our existing model, including language used for marketing, onboarding once they have activated their account, et cetera, but would certainly not require an overhaul. We are still working on putting the pieces in place for this to be implemented and can move quickly once that is finalized. We have continued to focus on being prepared to execute a growth plan once restrictions were lifted. You heard from Heather about one of the major enterprise initiatives being our online fundraising program, Gathered Goods. We are very excited about that program's successful launch and have a few other exciting upgrades and initiatives being implemented very soon. Also, I have recently pulled together an AI task force. Some of our employees had already begun exploring, so I formalized an opportunity for collaboration, allowing a safe space to see how we can best utilize it as part of our overall strategy. So far, we have implemented in ways that automate rote tasks, which can save money. We are excited about this starting point and continue to work together on transformational ideas that will propel us forward and allow us to compete in both retail and direct-to-consumer spaces. Lastly, I want to thank all of our shareholders for their patience, our employees for their hard work and commitment to our mission and our retail customers and brand partners for their loyalty during this challenging period. Having seen the resilience of all involved, I am confident in our collective ability to emerge stronger than ever before. I truly believe we are tackling our growth plan from a position of strength with our team of employees as well as the strategies being built and implemented with our sales and marketing and IT initiatives. Now that we have provided a summary of some recent activity, I will turn the call back over to the operator for questions and answers. Operator: [Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management. Paul Carter: Well, good afternoon, everybody, and Happy New Year. So I know you've described in the past how your sales force has kind of been sitting on the sidelines waiting for the company to, I guess, to get out of hock with your bank. And I know it's only been 2.5 months or so since you sold your building, but do you have any evidence yet that this transaction has reinvigorated your sales force for a more productive 2026? Craig White: Well, I think one of the main factors in that reinvigoration, as you mentioned, was bringing in new titles and reorders of out-of-stock bestsellers. But also what we see is the uptick or the increased activity in leader promotions. That's been very exciting. I started in the last month or two calling all brand partners that promoted to upper level leadership. And there's a lot of excitement out there. So that's my couple of points. Heather, would you like to expand? Heather Cobb: No. I mean I would echo what he said, Paul. Specifically, I think it's hard to say specifically that just the sale of the building was going to be enough for them to just immediately roll back into action. We announced just immediately after we made the purchases from that Phase 1 of new titles and reprints that they would be coming as we shared with you, late spring, early summer. We concluded our incentive trip promotion in December with just on target the anticipated number of earners that we had predicted. We launched a new incentive in January. And so while it's hard to say in the midst of the holidays, especially with Christmas and New Year, that we see specific things that are happening, we can definitely say that the energy feels slightly different in a much more positive way than it has in a while. Paul Carter: Well, that's good to hear. And then just changing gears. So obviously, it's nice to hear about the $0 debt balance. But do you have a new credit line in place? I know you've been talking about putting something small in place once this transaction was completed. Dan O'Keefe: Yes. We're talking to a few banks and also talking to some other options. We're right now in a cash position where we're, I think that we're looking for just a relationship for banking to go forward with. And so we're talking to some local banks that have some interest and hope to have something in place here in the next few months. Paul Carter: Okay. Great. Just talking about your balance sheet. So I know the value of your inventory is like I think it's more than 3x the market cap of your company. So obviously, that's pretty important to investors. And I just wanted to ask a couple of questions about that. I guess, first of all, is your inventory like fully insured against all risks like water damage or pests or anything? Because I know some of them have been sort of sitting in boxes for a while up on the shelf. But -- and is your inventory like insured at replacement cost or something else? Dan O'Keefe: It is insured at replacement cost. So what we have on the books is what it's insured for. So if we've got $39.1 million on the books at the end of November, that's what it's insured for, full replacement cost. Now we don't want to talk about any worst-case scenarios with disaster... Paul Carter: Yes. No, fair enough. Yes, I was just sort of wondering about that because I know -- and actually sort of related to that, we're not really damaged, but I'm just thinking about kind of the nature of your inventory. So I know most of your titles are things like zoo animals or whatever that don't go out of date. But like do you have a sense for what percentage of your inventory could be out of date and therefore, worthless in like 3 or 5 years if there's not a lot of sell-through in certain titles? Dan O'Keefe: So I would -- the only thing I would say in response to that is our track record has been we've carried inventory sometimes for in excess of 10 years on certain titles before we sell through them. And we've never historically written down inventory, and we've never basically offloaded the title or gone into the remainder market to sell the title. So that's kind of reflected in our reserve. Our reserve is very small on our short-term inventory and also on our long-term inventory because our history says we typically don't participate in the remainder market and don't have topics, as you mentioned earlier, that go stale or out of favor. Heather Cobb: Yes. Paul, unless you know something we don't, and they're going to change the alphabet on us, I think we're fairly safe. Paul Carter: Okay. No, that's good to hear. And I figured that was the case, but I just know that's one of the hesitations, I guess, that some investors have is that if you're sitting on so much inventory relative to current sales that maybe that inventory isn't worth a hundred cents on the dollar. But obviously, that's -- you're a little bit of a different company than a grocery store or something like that. Okay. And then just -- I know this will come out in your 10-Q, but how much of your $39.1 million of inventory is Usborne-related? Dan O'Keefe: About 50%. Paul Carter: Okay. And then can you provide an update on the status of your relationship with Usborne Publishing? I don't know that you've talked about them in a little while. Craig White: Yes. There's really been no change. Dan actually has monthly or at a minimum quarterly calls with their -- the equivalent of their, Chief Financial Officer. They're anxious for us to get back and start ordering titles again. So because of the new distribution agreement, we're not required to purchase every title they offer, which is good for us. But yes, there's been no negative change in the relationship. Paul Carter: Okay. Okay. That's great. And then just the last one here, totally random question. But just regarding that 17-acre attractive excess land beside the Hilti Complex there. What is your plan for that? Are you just going to hold on to it for the time being? Or do you have sort of longer-term plans for it? Craig White: Well, it's kind of been an ace in the hole. I kind of kept that in my back pocket for now. It's -- there's been some flurry of activity on it recently, actually, which is interesting. Some people have kind of come across it and inquired about it. We've been given a proposal to develop it, which is intriguing. But in that particular proposal, the return for us just wasn't what I thought it could be or should be. So for now, we're just kind of holding on to it. It could be something that we develop for ourselves. It could be something that we sell if need be or develop it and retain ownership of it. So there's lots of options. It hasn't been necessary to do anything with it at all, and it continues to appreciate. So I'm happy to continue to do that. Operator: [Operator Instructions] Craig White: I guess we did better than ever. Answering everyone's questions before they asked it. Operator: There are no further questions at this time. I would hand over the call to Craig White for closing remarks. Please go ahead. Craig White: Thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and expect to provide an additional update on the -- well, not the Hilti sale progress, but our banking relationship and just moving forward our growth plan. So again, thank you for joining us, and we'll talk again in May. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, ladies and gentlemen. And welcome to the Neogen Corporation Second Quarter FY 2026 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. At any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Thursday, 01/08/2026. I would now like to turn the conference over to Bill Waelke, Head of Investor Relations. Please go ahead. Bill Waelke: Thank you for joining us this morning for the discussion of the second quarter of our 2026 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, Mike Nassif, who will be followed by our new CFO, Brian Rigsby. Before the market opened today, we published our second quarter results as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation Slide two of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-Ks and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. I'll now turn things over to Mike. Mike Nassif: Thank you, Bill. Good morning, everyone, and thank you for joining the call today. I continue to be energized by the significant opportunity ahead at Neogen. Working alongside our highly engaged global team as we transform the company with a clear focus on improved top-line growth and profitability. We are the scale provider in a highly attractive industry, supported by strong long-term secular trends. And I have high confidence in our ability to overcome recent macroeconomic and execution-related headwinds. Our second quarter performance represents encouraging early progress. With a return to positive core growth across the enterprise and adjusted EBITDA margins improving nearly 500 basis points sequentially. The initial phase of our transformation is centered on stabilizing and strengthening our core. Providing a solid framework for future innovation. We began with cost structure improvements implemented in the second quarter, expected to deliver approximately $20 million in annualized savings. We will continue to rigorously evaluate resource allocation opportunities and instill a culture of disciplined operational execution across the organization. Turning to our commercial teams. We are implementing a rigorous process-oriented approach to commercial excellence. Emphasizing strong, operational planning and data-driven decisions. In food safety, where our scale and breadth of offerings provide a clear competitive advantage, we see significant opportunity to shift towards solutions-based selling. This approach should increase customer stickiness and drive greater cost portfolio penetration. Globally, over 75% of our food safety customers already purchase multiple product categories from us. And we have targeted initiatives underway to increase that percentage further by delivering comprehensive solutions tailored to their needs. In animal safety, we are focused on elevating our portfolio of products through our long-standing partnerships and have made investments to enable our commercial teams to drive growth. To accelerate all these priorities, we have strengthened our leadership with highly experienced operators. Including our new CFO, Brian Rigsby and our new chief commercial officer, Joe Friels, Joe is a seasoned diagnostics executive with extensive senior commercial experience at Abbott and Cepheid. He understands what world-class sales execution looks like, and I'm confident he will help transform our sales culture. We have also added Tammy Rennelly as senior vice president and general manager of our food safety business unit, James Meadows as head of North America food safety and Jeremy Yarwood as chief scientific officer. These leaders bring proven track records from top-tier companies and will accelerate both innovation and execution excellence at Neogen. In parallel with our commercial focus, we are applying the same discipline and urgency to operational efficiency in key project execution. We saw early benefits in the second quarter from our cost actions, which attributed to the sequential adjusted EBITDA margin expansion. We have continued to make progress on our sample collection product line and expect it to become a positive contributor to gross profit in the second half of this fiscal year. While there remains room for further improvement, we're committed to fully optimizing sample collection over the long term alongside broader enhancements in inventory management and operational efficiency. Another key priority is the integration of Petrifilm. Which remains on track for the 2027 timeline previously shared. We're currently in the latter stages of the production testing process, which has gone well. In parallel, we have moved into the initial stages of product validation, which is a comprehensive internal process to validate our ability to produce each of the 17 SKUs that we expect will be completed this summer. As part of the testing and initial validation work we have done so far, we've demonstrated the ability to manufacture petrifilm plates. These plates will continue to be subjected to a wide range of internal quality and performance testing. But the early results have been encouraging. As Brian will discuss later in the call, we are making positive progress on the previously announced sale of our genomics business. The completion of which will provide an opportunity to accelerate the deleveraging of our balance sheet. As a reminder, this past summer, we divested our cleaners and disinfectants business which allowed us to pay down $100 million of debt. To wrap up my opening remarks, I'm pleased with the initial progress we've made over the past few months. Which has led us to raise our outlook for the year and represents a solid step in the right direction. We are still in the early innings of our transformation journey. And the end market backdrop is not without some challenges. However, we believe they are solvable or transitory in nature. I have every confidence in our ability to exit this fiscal year as a stronger, leaner, and more disciplined organization positioned to increasingly focus on innovation, and the next leg of growth in fiscal 2027 and beyond. I look forward to meeting with many of you at the JPMorgan conference next week, where we will provide more details on our operational strategy. With that, I'll now turn the call over to Brian to share some details on our results and our updated outlook. Brian Rigsby: Thank you, Mike. And welcome to all the investors and analysts joining us on the call today. Similar to Mike, I'm incredibly excited to be part of the team at Neogen and emboldened by the significant opportunity ahead of the company to drive shareholder value. To that end, we saw a return to positive core growth in both segments for the first time in four quarters with total second quarter revenues of $224.7 million increasing 2.9% on a core basis. Looking at the components of growth, foreign currency added 0.9% and divestitures and discontinued products were a headwind of 6.6% compared to the prior year. The impact from divestitures was attributable to the sale of the Cleaners and disinfectants business which was completed in July 2025. At the segment level, revenues in our food safety segment were $165.6 million in the quarter, including core revenue growth of 4.1%. We saw the strongest growth in our indicator testing and culture media product category, led by sample collection, which benefited from an easy prior year compare, and petri film, which saw a nice recovery from the first quarter and returned to high single-digit growth. Double-digit growth in pathogens led the and general sanitation product category while the allergens and natural toxins category saw growth in allergens offset by a decline in natural toxins. From a macro perspective, we continue to see disruption at the customer level with food production volumes estimated to generally still be down across major producers a year-over-year basis. Additionally, there have been several major plant closures and food producer bankruptcies across the industry in the last twelve months. Given the short-term fundamental backdrop that we believe is primarily driven by inflationary cost pressures, we are even more encouraged by the strong results in the second quarter. While macro trends remain negative, there are signs some of the headwinds may begin to abate as we transition into fiscal year 2027 and beyond. Quarterly revenues in the Animal Safety segment were $59.1 million including core revenue growth that was approximately flat compared to the prior year quarter. We experienced solid growth in our product category led by higher sales of insect control products due in part to market share gains. In the veterinary instruments product category, lower sales were primarily driven by needles and syringes, while lower sales in the life sciences product category were largely driven by timing of orders and fulfillment. Our global genomics business had core revenue growth accelerate to 6% in the quarter, with solid growth in the bovine market partially offset by weakness in companion animal testing. From a macro perspective, we have also seen challenges in animal safety as a part of a multiyear trend with production animal herds, declining in The US to record lows. Most forecasts have this trend reversing next year as ranchers begin to invest again given record beef prices. But we will continue to take a more cautious approach as we approach guidance until evidence of positive improvement is more apparent. From a regional perspective, core revenue growth in the second quarter was led by our LatAm region, up high single digits with strong sales of pathogen detection products and petri film. The US and Canada region had core growth in the mid-single-digit range, with food safety up mid-single digits and animal safety about flat. Strong growth in sample collection as well as in petri film pathogen detection, and allergens was partially offset by a decline in food quality and culture media. The APAC region saw low single-digit core growth that was led by pathogen detection products, sample collection, genomics, offsetting declines in culture media and allergen test kits. Our EMEA region had core growth decline low single digits with growth in sample collection food quality, genomics, and petri film offset by declines in natural toxins culture media, and general sanitation products. Gross margin in the second quarter was 47.5% a sequential improvement of two ten basis points from the first quarter. With the increase due primarily to volume and lower tariff costs Excluding the impact of integration-related and restructuring costs, the second quarter gross margin was 50.3%. Addressing the production efficiency of our sample collection product line has been a priority and we saw improvement in the quarter, which is a trend we expect to continue in the second half of fiscal year. With an increased focus on inventory across the organization, we did see an elevated level of inventory write-offs in the quarter. We have described this as a multi-quarter process to return to more normal levels of scrap and continue to expect to see improvement in the second half as this is an item of high emphasis for our operations teams. Adjusted EBITDA was $48.7 million in the quarter, representing a margin of 21.7%. An improvement of four seventy basis points from the first quarter. The margin improvement was driven primarily by the higher gross margin and the headcount reduction implemented during the second quarter. Second quarter adjusted net income and adjusted earnings per share were $22.6 million and $0.10 respectively, compared to $9.4 million and $0.04 in the prior quarter due primarily to the higher level of adjusted EBITDA. Moving to the balance sheet, we ended the quarter with gross debt of $800 million, 68% of which remains at a fixed rate and a total cash position of $145.3 million. We remain in compliance with all debt covenants and remain comfortable with our position as we look to the second half of the fiscal year. Free cash flow in Q2 was $7.8 million representing an improvement of $20.9 million from Q1. The result of lower CapEx and improved trade working capital efficiency. Importantly, we expect that routine CapEx will trend towards more normal levels of 3% to 4% of revenues starting in late fiscal year 2026 which will further improve free cash flow trends. As Mike noted earlier, we are raising our full-year guidance for fiscal 2026 to reflect the second quarter performance being ahead of our expectations. We now expect revenue to be in the range of $845 million to $855 million and adjusted EBITDA to be approximately $175 million for the fiscal year. This updated guidance reflects a cautious approach to the second half of the year given the lingering weakness in our end markets opportunities. and the fact that we have a new team on board that is still settling in and evaluating As a management team, Mike and I take very serious the commitments and guidance we provide to investors. Looking on a quarterly basis, our guidance contemplates revenue in the fourth quarter being modestly higher than the third quarter which we are assuming will step down from the second quarter due primarily to seasonality. And that adjusted EBITDA margins will follow a similar trend. We continue to expect our capital expenditures for the year will be approximately $50 million and that free cash flow will be positive. We have also previously disclosed that we have a process underway to divest our global genomics business. The process continues to move along. And while the timing of such processes is inherently difficult to predict, we anticipate being able to make an announcement in the fourth quarter of the current fiscal year given the current stage of the process. In addition to the net proceeds being prioritized for debt reduction, this divestiture will further simplify and focus the business and also position the business for enhanced incremental margins. I'll now hand the call back to Mike for some final thoughts. Mike Nassif: Thanks, Brian. When I joined Neogen, I was thrilled to lead a company with strong leadership positions and highly attractive end markets. While we have faced both macroeconomic headwinds and execution challenges, we believe these are solvable. And that Neogen's best days lie ahead. Now nearly five months into my role, I've had the privilege of meeting many of our customers and team members around the world. These interactions have only strengthened my optimism and deepened my appreciation for the power of the Neogen brand. Our customers don't see us simply as a supplier. They view us as a true partner and a trusted authority in food safety. We are committed to further strengthening these vital partnerships. Accelerating groundbreaking innovation, and delivering greater value to our customers than ever before. In my interactions with team members across the globe, I've been deeply encouraged by the passion and commitment I've witnessed firsthand. The thoughtful dialogue and sharp insights shared in these conversations reaffirm what I already knew. We have an exceptional team that is fully invested in our mission. We now have a strengthened leadership team in place. Seasoned executives with deep experience driving in global life sciences and diagnostics businesses, They bring a disciplined, fundamental focused approach centered on process excellence clear prioritization, cross-functional collaboration, transparency, and accountability. Importantly, we are already seeing strong buy-in across the organization as we implement these changes. A clear signal that we are aligning around the right strategy to unlock Neogen's potential. In closing, I want to extend my heartfelt gratitude to every employee around the world for your hard work, resilience, and unwavering dedication. It is your talent and commitment that will drive our success. And I'm more confident than ever in our ability to deliver outstanding results for both our customers and shareholders. Thank you, And now I'd like to turn things over to the operator to begin the Q and A session. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift a handset before pressing any keys. Your first question comes from Bob Lovick with CJS Securities. Your line is now open. Bob Lovick: Good morning. Congratulations on the strong results in Outlook. Thanks, Bob. People on board and and and for everyone to know, gel and make a difference and and you know, start start operating as one. Yeah. Thank you for that question. Know, the great news is we've attracted top-tier talent to this company, which speaks highly to the opportunity we have at Neogen. In turning this business around. I was recruiting for the talent, I was really looking for very experienced leaders in diagnostics or life sciences that have been part of large organizations that understand the discipline and complexity of managing global businesses But more importantly, we're operators, though they were able to zoom in and zoom out really help the organization accelerate know, the basics that I've talked about before. And I think that's extremely important because know, we've got a great workforce And in some cases, you know, we're trying to implement global processes that require a lot of hands-on initially to get everybody going in the same direction. So I'm I'm very, I'm very proud, and I think we're extremely lucky to have attracted the talent that we've attracted. As far as how long it's gonna take to get them up and running, I would say that given the talent caliber and experience of these professionals, they're already hitting the ground running. You know? And our business is not so different than the than the human diagnostics business. So from a technology and go to market, there's a lot of similarities there. So we've got a very robust onboarding plan for all of the leaders and we are starting now to meet as a full management team and really focusing on the priorities, which have not changed, which are all about driving top line, optimizing our growth, and really focusing and becoming masters in the fundamentals. Bob Lovick: Okay. That sounds great. And then maybe just one more question. I'll jump back in queue. And obviously, good quarter, strong sequential margin improvement. But you know, I think you said you'll get better improvement in sample handling in the back half. I'm trying to get a sense what was the headwind to margins maybe from sample handling? Or or maybe said another way, once you get that to the margins you want, what would be the equivalent or close EBITDA margins at current levels? And then obviously, as top line grows, you can grow that from there. Mike Nassif: Yeah. I mean, let me give you a little bit of my thoughts on sample collection. And then I'd I'd like to ask Brian to share his thoughts as well, more specifics. But listen. Sample collection is is a challenge for us. We've been pretty transparent about that. We're working it. Multiple fronts from making sure that pricing is reflective of the average price in the market We are taking all of the improvements on improving the efficiency on the line. I think the great progress that we have made in in getting back getting out of backorders means that we can reduce the temporary labor, some of the scrap, and other things that were impacting our large to kinda get it more steady state You know? And we are 100% focused on improving profitability on the product. But this continues to be a gateway product that our customers need. But it leads to other, you know, other purchases within our portfolio. And I I personally don't think the product's ever going to be as profitable as other parts in our portfolio but we're not giving up, and we're gonna continue to be focused on that. But I would say high level, we would expect this product to return to some profitability in the second half. And I'd to ask Brian to share any thoughts on that. Brian Rigsby: Yeah. Thank you, Mike. But my comment would just be, I think if you look at the at our non-GAAP reconciliation schedule where we've been excluded the negative impact of that previously. Can see that it was Q4 in Q4, it was around $10 million. In Q1, it was $6 million. Q2, it was around $3 million So the trend is favorable. And, again, to Mike's comments, we expect to turn positive as we move into the back half of the year. Bob Lovick: Okay. Super. Congrats again. Thank you. Brian Rigsby: Thank you. Thanks, Bob. Your next question comes from David Westenberg with Piper Sandler. Your line is now open. Congrats on a really good quarter here. David Westenberg: So I'll just start off with why the implied HD growth, or margin, a little bit higher falling, you know, a really good quarter. Do you think is this conservatism? Or like first quarter for both the CFO and I guess second quarter for the CEO, You just wanna make sure that every everything's right here. Mike Nassif: Yeah. Let me start. I'll I'll I'll share some thought. Thank you for the question. I think that's a very fair question. And we'll ask Brian to jump in. I mean, I think, listen. What what you see contemplated in the guide is our prudent approach approach to beginning to return the business to sustainable performance. You've heard me talk about that last time, and I'm very much focused on driving free. Predictability in this business and consistency. Listen. I'm happy with how the org is reacting to the new ways of working in the very short period time that we've been here. And Q2 is is is a great quarter, but it's one data point. We've also got a brand new team that's gonna be settling in and learning how to work together and really start to scale these things that we put in place. And I would say just as important, and Brian and I talk a lot about this, we understand the importance of our commitment to investors and building credibility. That's extremely important to us. And so with that said and the lingering macroeconomic weaknesses, tariffs, uncertainty, and what have you, you know, we feel confident with the trajectory. The early progress we've made. And taking all of that into account, we believe it's appropriate to take a conservative tact for the remainder of the fiscal year. And the last point I'd make is it's important to note that we are now forecasting a positive growth for the year given this latest update on the guide. Brian? Brian Rigsby: Yeah. I would just echo Mike's comment in terms of, you know, it's one data point. We did raise the guide to reflect the over delivery in Q2. But, you know, we we've got a new team in here I've been here for two months now. And and we just wanna make sure that we know, take the right approach that relates to how we manage the guy. David Westenberg: Perfect. And, just asking one more kind of basic blocking tackling question as we look at our models. Were there any onetime revenue tailwinds in the quarter? And we think about recurring adjustments how do we think about those cycling through for the rest of the year? I think, with the recurring adjustments, it's one of those, have limited time. But, I mean I mean, I guess, you always have new ones. So I guess anyway, anyway to think about that, like, Anyway. Brian Rigsby: Yeah. Sure. I I'll take the question. Mike can add anything you like. The the only thing I would recall, we we did have about $2 million of insecticide tailwind in Q2 in the animal safety segment. But but, really, that would be the only thing of note that I would call out as a as a onetime. Mike Nassif: Yeah. The only thing that Yep. Yeah. David, what what I would just add is that you know, we saw you know, it's it's it's crazy when, you know, the simplicity sometimes is you get what you measure. So know, driving the commercial excellence, focusing on key products, when you think about you know, petri film, pathogen, allergens, which have been a focus for us in that quarter, you see very healthy returns on those when you drive the right focus. And so you know, we were we were very pleased with how the organization's responding to the additional focus. And we feel that a lot of this growth was due to driving the specificity and commercial excellence. So the organic growth is is great, and now we're looking to you know, scale that and accelerate it. David Westenberg: Got it. I'll just give it a two knowing that, know, you still have a few more analysts to ask for questions on. Okay. Mike Nassif: Thanks, David. David Westenberg: Your next question comes from Brandon Vazquez with William Blair. Your line is now open. Brandon Vazquez: Hey, good morning, guys. Thanks for taking the question and congrats on a nice quarter as well. Mike, maybe as you sit, you know, you're maybe about six months into the seat now. You guys have had a a strong quarter here. Talk to us a little bit about specifically what in the commercial organization has changed that is working. This is probably the first time in several quarters, if not a couple of years, where you've been able to kinda accurately forecast the business and actually give improving expectations for the business on a go forward basis. So what is working and what's giving you the confidence to raise guidance already less than a a year into the c in the CEO seat? Mike Nassif: Yeah. Thanks, Brandon. And listen. I wish I can tell you something that makes me look really smart. Reality is it's just focusing on the basics and driving simplicity. You know, I think that, you know, last quarter when we were talking about know, in in the quarter, discussion, but also on the one on ones, You know, specifically, the organization was very comfortable doing monthly forecasts for example. And very early on, that didn't seem like the right approach given our history of missing our forecasts. So we instituted a weekly latest best estimate process where we bring in all of the sales leaders and all of the supporting functions on a weekly basis reviewing the forecast, reviewing the risks and opportunities, reviewing the targeted accounts, discussing what needs to be, what do we need to do to enable the sales team to deliver on the commitments to the customers, And, you know, I would say in the first couple weeks, it was a little bit rough. But now you see the leaders running the calls and the whole organization is really focused on enabling the commercial team. And and one of the things that I think I've shared and I've been trying to instill in the organization is our commercial team needs to be very customer centric. The rest of the organization needs to be in service of the commercial team. And that is how we're driving this. And so early signs is that this is really resonating with the organization, and I think we can kinda see that the in the Q2 performance. Now that said, we don't wanna get ahead of our skis. We're gonna continue to do the same thing this quarter that we did last quarter. Get the new leaders on board, drive more com you know, drive more specificity making sure we're really looking at the opportunities, addressing the concerns, you know, that we have and the headwinds in the market. And I think, really, that is the the formula for success. Brandon Vazquez: Got it. Great. That's that's helpful. Then of the other big questions I get a lot with investors now, and and I'm sure you're aware, is just the feature film manufacturing process. You made a couple of comments in your prepared remarks. On some confidence there. Can you maybe just spend another minute on, like, what is it that's giving you confidence that this is continuing on time And Yeah. Know, what are you seeing in the early ramp of that facility? Mike Nassif: Yeah. Absolutely. And this is a super important project for us. In Q1, I shared that early on, I knew this was a priority, and I spent a lot of time with Jim Walters, our head of operations and the manufacturing team really looking at the at this plan. You know, having been in biopharma businesses and med tech businesses, any tech transfer has a lot of challenges. In this case, we're doing 17. On 17 SKUs. And I was very proud and, and happy, pleasantly surprised, I guess, happy of how the team has thought about all of the potential factors and things that can come to play in in making sure that this transition is is extremely successful. And I think that since then, we have executed that plan. That plan remains the same. We remain, extremely focused, and the process of doing that is starting to you know, demonstrate some results. And so we're we're still on track for the November 2027 timeline. We're in the late stages of production testing, which has gone very well so far. In parallel, we've begun initial phases of product validation. Which we expect to continue into the summer. You know, as I mentioned, in the opening remarks, throughout the course of production testing and the initial product validation work, we've demonstrated that we can manufacture petrifilm. On the new equipment, which is a very important milestone. You know? And so gonna continue to execute the plan. We've got the right talent, the right resources. This is the top focus for us. We are not sparing any any any focus or resource required. And, that's what gives me confidence. Brandon Vazquez: Got it. Thanks a lot, guys, and congrats again. Mike Nassif: Thanks, Brandon. Your next question comes from Subbu Nambi with Guggenheim Securities. Your line is now open. Thomas DeBourcy: Hi, guys. This is Thomas on for Subbu. Thanks for taking our questions. For the growth in indicator testing and culture media, much of that was volume driven, and then how much was on price? Just trying to gauge how we should think about growth for the rest of the year and if that's sustainable. Mike Nassif: Yeah. I can share some thoughts, and and maybe wants to add a few things. I would say that most of it is organic growth. You know, these are these are product lines that we drove specific focus on. And so there are some you know, last quarter, we did share that there was a part of the decline of petri film was due to a inventory correction in our major distributor in The United States, We've seen that distributor go back to normal levels. And when you look at sellout data, it's around 9%. You know? So the the PFM market continues to be healthy. We continue to be the market leader and growing, you know, at that pace. I think pathogens is also another one where we're seeing significant growth, but organic growth. Just due to you know, all of the illnesses, the rise in illnesses and other things, you know, that you see then with allergens, know, that was, as you guys might be aware, you know, we've had some supply issues in the past. We're not through those. Working we've worked through all of the back orders. And we're regaining some lost customers. And we're really looking to get that platform back on state growth. Brian, anything you wanna share there? Brian Rigsby: Yeah. I would just say, total, you know, up 6% and and just more volume than price. Would be the only thing I would emphasize. Thomas DeBourcy: Okay. Awesome. And then maybe just to stay there on Petrie Film. What are your updated assumptions around the 2026 growth rate? And then just how should we think about this longer term, if feature film? much of the growth was volume, is there pricing power still available in the market to take for Thank you, guys. Mike Nassif: Yeah. I mean, I think the, there's always there's always pricing opportunity. And in fact, that's it. Standard language in all of our contracts. One of the things that you know, is not unique to this business is that we have different contract durations and different contract expiry. So as new contracts come on board, certainly, the inflationary pricing adjustments are are introduced. And, of course, when we launch new Petri film, tests, that we always, you know, price that accordingly. I think there continues to be an opportunity to adjust for inflationary measures as new contracts come up for renewal Yeah. I think the only thing I would add is just that you you may recall that in Q1, we had one our largest U. S. Distributor adjusting their inventory levels, which provided for a headwind in Q1 even though the end market Yeah. That's a good one. Yeah. Was still strong. And so that phenomenon wasn't there in the second quarter, so we would expect the remainder of the year for that product to look more like Q2. Operator: Your next question comes from Thomas DeBourcy with Nephron Research. Your line is now open. Thomas DeBourcy: Hi. Thanks, for taking the question. I was just wondering, like, just in terms of, you know, I guess, help me get to the CEO role, your feedback from customers, you know, the business overall. Obviously, they've had to deal with some stockouts of certain products, like a tip collection and just their willingness to kind of work with you as you you know, ramp up production to get back towards more normal inventory levels and then just overall, the business is there a rough breakout you could give in terms of volume versus price in term of the organic growth? Thanks. Mike Nassif: Thanks, Tom, for your question. You know, by now, I have visited all regions and have visited customers distributors, direct customers from around the world. And I honestly have to say, you know, I've never been in a market where customers are rooting for you. Like they are for Neogen? We are a food safety company. I can't tell you how many customers know, some more impacted than other with our supply issues. But they want us to succeed. They see us as a vital partner in their food safety quality program. If, you know, if you if you look at food safety quality program at sites, these are cost centers. You know? These are you know, they're doing the testing required and sometimes they have a lot of turnover. And when there are gaps in their competency or gaps in their training, or knowledge, They rely on Neogen to help fill that gap. And I think that is one of the one of the advantages that we have in addition to having a full food safety portfolio is that we are seen as the experts in the food safety business. And so it has been consistent around the world. Yes. Some customers are frustrated. But they very much want us and need us to succeed because that means that their food safety programs will also succeed. Brian, I don't if you have anything more to just say similar to my earlier comment. Around another product category. It was it was positive, but more volume than price. Thomas DeBourcy: Yeah. Great. Thank you. Operator: There are no further questions at this time. I will now turn the call over to Mike Nassif for closing remarks. Mike Nassif: Great. Thank you, everybody, for joining and all of the conversations and the feedback. I very much look forward to seeing many of you, next week at JPMorgan to continue the conversation. Have a great rest of your day. Operator: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
Wendy D. Kelley: Good day, and welcome to the WD-40 Company's first Fiscal Year 2026 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question and answer session. Please press 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, telephone keypad. I would now like to turn the presentation over to the host for today's call, Wendy Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed. Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-40 Company's President and Chief Executive Officer, Steven Brass, Vice President and Chief Financial Officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending 11/30/2025. These documents will be made available on our Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, 01/08/2026. The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve. Steven A. Brass: Thanks, Wendy, and thank you all for joining us today. Today, I'll start with an overview of our sales results for 2026 and then provide an update on the progress we've made against certain elements of our four by four strategic framework. Then Sara will dive deeper into our first quarter performance, review our business model, give a brief update on the divestiture of our home care and cleaning business, and review our outlook for fiscal year 2026. After that, we'll open the floor for your questions. Today, we reported consolidated net sales of $154.4 million, representing a 1% increase compared to last year. Let's take a closer look at these results and unpack what's driving our performance. Maintenance products remain our primary strategic focus, representing approximately 96% of total net sales for the quarter. Net sales for these products reached $148.9 million, a 2% year-over-year increase. While this performance came in below our long-term growth targets, we remain highly confident in the strength of our growth trajectory for both the fiscal year and longer term. As you know, we go to market through a combination of direct operations and marketing distributors. Our direct markets accounted for 83% of our global sales during the first quarter and maintenance products grew by 8% in those markets, in line with our long-term growth targets. The softness we saw in the first quarter was primarily due to timing-related factors within our marketing distributor network, not a decline in end-user demand. Marketing distributors represent about 17% of our global sales, and typically exhibit greater quarter-to-quarter variability. These markets offer significant long-term growth potential but can be more volatile period to period. As I shared last quarter, we anticipated the Q1 pullback, particularly in Asia Pacific, as distributors managed inventory levels. I'll provide more detail on Asia Pacific performance shortly. We remain confident in a strong rebound later this fiscal year. The second quarter is already off to an excellent start with solid growth across all three trade blocks. We have visibility into a number of upcoming initiatives, giving us confidence in delivering a solid fiscal year result. I'm also pleased to report that our gross margin continues to strengthen. In the first quarter, we reported a gross margin of 56.2%, which is an improvement of 150 basis points sequentially from the fourth quarter and 140 basis points compared to the first quarter of last fiscal year. Gross margin, excluding the impacts of the gas assets we currently have held for sale, was 56.7%. Sara will share more detail about our gross margin in just a few minutes. Now let's talk about first-quarter sales results by segments starting with The Americas. Unless otherwise noted, I'll discuss net sales on a reported basis compared to the 1st Quarter Of Last Fiscal Year. Sales In The Americas, which include The United States, Latin America, and Canada, was $71.9 million in the first quarter, an increase of 4% compared to last year. Sales of maintenance products were $68.6 million, an increase of 5% or $3.2 million compared to last year. The bulk of this growth was driven by higher sales and maintenance products in The United States and Latin America, which increased 312%, respectively. In The United States, sales of WD-40 Multi-Use Product increased following a modest price adjustment in 2026. But this was partially offset by lower volumes due to the timing of customer orders. In Latin America, higher sales of WD-40 Multi-Use Product were primarily driven by expanded distribution and successful promotion activity. In Mexico, maintenance product sales were also positively impacted by higher sales of WD-40 Specialist, which increased 14% primarily due to increased online retail sales, new distribution, and increased demand primarily in The United States. Home care and cleaning product sales declined 18%, reflecting our strategic shift toward higher-margin maintenance products alignment with our four by four strategic framework. In total, our Americas segment made up 47% of our global business in the first quarter. Now let's take a look at our sales in EMEA, which includes Europe, India, Middle East, and Africa. Excluding the impact of the home care and cleaning we divested in 2025, net sales of $58.7 million, an increase of 5% or $2.8 million compared to last year. This growth was driven primarily by a 27% increase in WD-40 Specialist sales fueled by heightened promotional activity and successful new product launches in key direct markets. Sales of WD-40 Multi-Use Product in EMEA remained relatively constant. We continue to see strong trends in many of our direct markets. However, the increased sales in our direct markets were fully offset by softer performance in EMEA distributor markets, primarily due to the timing of customer orders reflecting the inherent variability often experienced in our distributor markets. While distributor sales declined in aggregate, India was a standout delivering a $1.4 million increase. In total, our EMEA segment made up 38% of our global business in the first quarter. Now on to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, were $23.9 million, a decrease of 10% or $2.7 million compared to last year. Sales of WD-40 Multi-Use Product were $18.3 million in the quarter, a decrease of 12% compared to last year. Although segment sales declined in the first quarter, we achieved strong growth in China, where sales increased 8% over the prior year. This performance was driven by expanding distribution and effective promotional initiatives. These gains were fully offset by lower sales of WD-40 Multi-Use Product in Asia distributor markets, where sales decreased by GBP 3.3 million or 33%. As noted earlier, this was primarily driven by the timing of customer orders as distributors that heavily participated in promotional activities during 2025 adjusted to more typical inventory levels. This performance was anticipated and factored into our fiscal year 2026 guidance. Importantly, we continue to expect a strong rebound later in the fiscal year. In Australia, sales of maintenance products remain constant. Home care and cleaning product sales, remain a strategic focus for us in Australia, declined by 5% compared to last year, primarily due to the timing of customer orders. In Asia Pacific, sales of WD-40 Specialists were up 2% in the first quarter due to higher sales volume from successful promotions and marketing efforts in Australia and China. In total, our Asia Pacific segment made up 15% of our global business in the first quarter. Now let's talk about our Must Win Battles. Amos Win Battles focused on accelerating revenue growth in maintenance products. Starting with must-win battle number one, lead geographic expansion. In the first quarter, sales of WD-40 Multi-Use Product reached $118 million, decreasing 1% compared to last year. While this performance does not align with our long-term growth objectives, we've made excellent progress this quarter in many key markets. With strong sales growth of $1.4 million in India, $1.2 million in Mexico, $900,000 in Iberia, and $800,000 in China. At 72 years young, we captured only 25% of our global growth potential for our flagship product. We estimate the attainable market for WD-40 Multi-Use Product to be approximately $1.9 billion compared to fiscal year 2025 sales of $478 million, leaving an opportunity of roughly $1.4 billion to nearly quadruple current sales. Capturing that growth simply means continuing what works. Expanding brand awareness and distribution across 176 countries and territories. All occasional soft quarters are part of the journey, they don't change our strategy, our long-term opportunity, or our positive outlook. Next is must-win battle number two, accelerating premiumization. Our second must-win battle is to accelerate the growth of premium formats of WD-40 Multi-Use Product. Innovation drives this strategy. We design products like Smart Straw and Easy Reach, with end users at the heart of every decision. This end-user-focused approach strengthens brand loyalty, supports gross margin growth, and deepens our competitive advantage. In the first quarter, sales of WD-40 Smart Straw and EZ REACH when combined up 4% over the prior year. Premiumized products currently account for approximately 49% of WD-40 Multi-Use Product sales, leaving considerable room for continued growth. We target a compound annual growth rate for net sales of premiumized products of greater than 10%. Our third must-win battle is to drive WD-40 Specialist growth. When we introduced the WD-40 Specialist alongside the WD-40 Multi-Use Product, not just adding variety. We're strengthening our brand, capturing new segments, and offering end users more choice without diluting what makes our core brand iconic. In the first quarter, sales of WD-40 Specialist products were $22.5 million, up 18% compared to last year. We estimate the global attainable market for WD-40 Specialists to be about $665 million with only 12% of that potential realized to date with roughly $583 million in growth opportunity ahead. We target a compound annual growth rate for net sales of the WD-40 Specialist at greater than 10%. Our fourth must-win battle is to Turbocharge Digital Commerce. Our digital commerce strategy is a catalyst for growth across the business. Not merely a channel for online sales. It plays a vital role in advancing each of our must-win battles by increasing brand visibility, improving accessibility, and driving deeper engagement with end users across global markets. In the first quarter, e-commerce sales increased 22%, primarily driven by strong sales of WD-40 Specialist in The United States. Now let's move to the second element of our four by four strategic framework, strategic enablers, which emphasize operational excellence. Today, I'll provide an update on strategic enablers one and three. Our first strategic enabler is to ensure a people-first mindset. At WD-40 Company, we've long held the belief that first you build the people, and the people build the business. We strive to be an employer of choice for all employees and their best selves to work. In November 2025, we completed our latest employee engagement survey and I'm proud to share that we've been able to increase our employee engagement index score to 95%. A new record high for our organization. Additionally, 97% said they actively collaborated, shared knowledge and ideas, and drove better results. These results underscore how global collaboration accelerates our success and reflects our bold ambition to become a world-class global learning organization. Our third strategic enabler is achieving operational excellence in the supply chain. Profitable growth depends on a supply chain that's optimized, high-performing, and resilient. This enabler has been key to expanding gross margins through cost reduction initiatives such as packaging improvements, logistics efficiencies, and strategic sourcing. In the first quarter, we delivered global on-time performance of 97.6%. Even while we continue to increase production capacity to support our must-win battles. Our global supply chain team also made strong progress in engaging with key suppliers and advancing our responsible sourcing policy. With that, I'll now turn the call over to Sara. Sara K. Hyzer: Thanks, Steve. Today, I'll offer insights into our business model, highlight key takeaways from our first-quarter performance, and provide a brief update on the planned divestiture of our Home Care and Cleaning business in The Americas. Today, we are reaffirming our full-year 2026 guidance. While our guidance ranges remain unchanged, I will provide some additional color on our outlook. Let's start with the big picture. While our first-quarter results were below our long-term growth targets, we did expect to get off to a slower start this year. And we believe we are set up for a strong year. We have numerous activities scheduled in the back half of the year giving us confidence that we will be at the mid to high end of our guidance ranges. Our results can fluctuate quarter to quarter, driven by the timing of promotional activity and customer order patterns. WD-40 Company is built for durable value creation. Driven by brand strength, operational discipline, and a culture of continuous improvement. This foundation positions us for sustained growth and strong stockholder returns for decades to come. And with that, let's start with taking a closer look at our business model. Our business model is a strategic tool we use to guide our business. It is built around three core areas: gross margin, cost of doing business, and adjusted EBITDA. In the near to midterm, we continue to evaluate each component of the model within a range, allowing us to adapt while staying aligned with our long-term objectives. Because our business model is based on revenue, quarter-to-quarter variability in sales can lead to fluctuations in its performance. We will begin with gross margin performance, which continues to be strong, building off our solid recovery in fiscal year 2025. In the first quarter, our gross margin was 56.2%, up from 54.8% in the first quarter of last year, representing an improvement of 140 basis points and was most significantly impacted by the following favorable factors: a 110 basis points from lower specialty chemical costs and lower CAM costs, and 60 basis points from higher average selling prices, including the impact of premiumization. These positive impacts to gross margin were partially offset by higher filling fees, primarily in EMEA, which negatively impacted our gross margin by 50 basis points. Gross margin in The Americas rose to 90 basis points, from 50.4% to 53.3%, driven by higher average selling prices and by lower specialty chemical costs and lower can costs. Gross margin in EMEA increased 90 basis points from 57.8% to 58.7%, which was mostly driven by the favorable impact of foreign currency exchange rates partially offset by higher billing fees. While still well above our 55% target, gross margin in Asia Pacific decreased slightly by 70 basis points, from 59.6% to 58.9%, primarily due to decreases in average selling prices linked to changes in sales mix. We're very pleased with the trajectory of gross margin. But external risks like cost volatility, tariffs, and inflation remain part of the landscape. To mitigate these and strengthen margins over time, we're driving initiatives such as supply chain cost reduction, premiumization, new product introductions, geographic expansion, and asset divestitures. These levers reinforce our confidence in our gross margin's long-term potential. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain noncash expenses. Our cost of doing business is primarily driven by three areas: strategic investments in people, global brand-building efforts, and freight expenses associated with delivering products to our customers. Investing in our future remains a top priority. While our long-term goal is to keep the cost of doing business within a 30 to 35% range, we're making strategic investments to drive sales growth and enhance operational efficiencies. These investments strengthen our foundation and position us for sustained growth. We also need time to absorb the loss of revenue associated with the home care and cleaning divestitures. Revenue growth is a key driver of our cost of doing business ratio. With a slower start to the year and continued investments to fuel long-term growth, our cost of doing business temporarily moved above our target range. For the quarter, the cost of doing business was 40% of net sales, compared to 37% last year. Our first quarter typically carries higher expenses due to essential planning meetings and increased travel, which are critical for setting our strategic direction for the year. I view this quarter's cost of doing business as an anomaly. And as we execute our strategies to accelerate top-line performance, we expect this ratio to improve over the course of the year. In dollar terms, our cost of doing business increased $4.6 million or 8% compared to last year. Changes in foreign currency exchange rates had an unfavorable impact of $1.3 million this quarter. The majority of the remaining increase, $2.8 million, was driven by higher employee-related expenses, including additional headcount to advance initiatives in our strategic framework and strengthen our information system. In addition to higher travel and meeting expenses this quarter over the prior year. Advertising and promotional expenses decreased slightly year over year. As a percentage of net sales, A and P spend was 5.3% this quarter, compared to 5.5% last year. While we are currently tracking below our full-year guidance of around 6% of net sales, we have brand-building initiatives planned for the remainder of the fiscal year, which we expect will bring A and P investment in line with our fiscal year guidance. While we always seek cost efficiencies, scale, not cost-cutting, is what will move us toward our long-term cost of doing business target. As revenues grow, we expect the cost of doing business to trend toward 30% to 35%. With sales growth being the key driver of improvement. Turning now to adjusted EBITDA. Adjusted EBITDA as a percentage of sales is a key measure of profitability and operational efficiency. Our 20 to 25% target range for adjusted EBITDA margin is a long-term aspiration. However, we continue to believe we can move adjusted EBITDA margin back to our midterm target range of 20% to 22% once we have absorbed the loss of revenues associated with the home care and cleaning divestiture. Divestitures. In the first quarter, our adjusted EBITDA margin was 17% compared to 18% last year. Adjusted EBITDA is a critical component of our business model. With our low debt capital light structure, much of it converts to free cash flow, enabling consistent stockholder returns and long-term value. Now let's turn to other key measures of our financial performance. Operating income, net income, and earnings per share in the first quarter. Operating income declined 7% to $23.3 million in the first quarter. While net income fell 8% to $17.5 million. On a pro forma basis, which excludes the impact of the home care and cleaning products divested and those classified as held for sale, operating income and net income would have declined 45%, respectively. Declines in operating income and net income were primarily driven by softness in top-line sales, which we are expecting to bounce back over the course of the year. Decreases were also driven by higher SG and A expenses compared to the prior year. Diluted earnings per common share were $1.28 in the first quarter compared to $1.39 last year, reflecting a decrease of 8%. Our diluted EPS reflects 13.5 million weighted average shares as outstanding. On a pro forma basis, EPS would have decreased 5%. Now let's review our balance sheet and capital allocation strategy. We maintain a strong financial position and healthy liquidity, supporting a disciplined capital allocation strategy that drives long-term growth and delivers consistent cash flow and returns to our stockholders. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings. On December 10, our Board of Directors approved a quarterly cash dividend of $1.2 per share, an increase of more than 8% over the prior quarter. This reflects the board's confidence in future cash flows and underscores our commitment to returning capital to stockholders through consistent dividends. During the first quarter, we repurchased 39,500 shares of stock at a total cost of $7.8 million under our share repurchase plan. We have approximately $22 million remaining under our current repurchase plan, which expires at the end of this fiscal year. We have accelerated buybacks and plan to fully utilize the remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. Our focus remains on accretive capital returns that reflect confidence in the enduring value of our stock. Finally, before I move to guidance, I would like to provide a brief update on the household divestiture. We continue to make progress on the sale of our America's home care and cleaning product brands. Our investment bank continues active discussions with multiple potential buyers. Although there's no certainty of a deal, we remain optimistic, and I will provide further updates as appropriate. So let's turn to FY '26 guidance. As a reminder, we issued this year's guidance on a pro forma basis, excluding the financial impact of the Home Care and Cleaning brands. Currently classified as assets held for sale. While the exact timing of the transaction remains uncertain, we believe this approach will provide investors with clarity on the direction of the core business, and help minimize the noise surrounding the transaction. While first-quarter sales results were below our long-term growth targets, as we mentioned, we anticipated a slower start to fiscal 2026. The softness was driven by timing factors within our marketing distributor network, not by a decline in end-user demand. All indicators point to a strong rebound later in the fiscal year. Accordingly, we are reaffirming our guidance today. With the visibility we have into numerous activities already scheduled for the back half of fiscal year 2026, we are highly confident in delivering results at the mid to high end of our guidance ranges. For fiscal year 2026, we expect net sales to be between $630 million and $655 million after adjusting for foreign currency impacts. A growth of between 5-9% from the pro forma 2025 results. Gross margin is expected to be between 55.5-56.5%. Advertising and promotion investment is projected to be around 6% of net sales. Operating income is expected to be between $103 and $110 million, representing growth of between 5-12% from the pro forma 2025 results. The provision for income tax is expected to be between 22.5 and 23.5%. And diluted earnings per share is expected to be between $5.75 and $6.15, which is based on an estimated 13.4 million weighted average shares outstanding. This range represents growth of between 5-12% over the pro forma 2025 results. This guidance assumes no major changes to the current economic environment. Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2026. In the event we are unsuccessful in the divest of The Americas Home Care and Cleaning brands, our guidance would be positively impacted by approximately $12.5 million in net sales, $3.6 million in operating income, and 20¢ in diluted EPS on a full-year basis. That completes the financial overview. Now I would like to turn the call back to Steve. Steven A. Brass: Thank you, Sara. In summary, what did you hear from us today on this call? You heard that sales in our direct markets grew 8% in the first quarter in line with our long-term growth targets. You heard that this increase in sales was partially offset by softer sales in our marketing distributor network relating to timing-related factors, not a decline in end-user demand. You heard that sales of WD-40 Specialists were up 18% in the first quarter. You heard that sales in the e-commerce channel were up 22% in the first quarter. You heard that after seventy-two years, we've kept only about 25% of our global growth potential on our core multi-use product, leaving roughly $1.4 billion in opportunity to nearly quadruple current sales. You heard that in the first quarter, our gross margin was 56.2%, up 150 basis points from the fourth quarter and 140 basis points from the same period last year. You heard that we've been able to increase our employee engagement index score to 95%, a new record high for our organization. You heard that we've accelerated buybacks and plan to fully utilize our remaining authorization, reinforcing our strong conviction in the company's long-term fundamentals. You heard that our board approved a quarterly cash dividend of $1.02 per share, up more than 8% from last quarter, and this increase reflects strong confidence in our cash flow outlook and our ongoing commitment to stockholder returns. You heard that we are off to a strong start in the second quarter with solid growth across all three trade blocks. And you heard that reaffirmed our guidance ranges. With the visibility we have into numerous activities planned for 2026, we're highly confident in delivering results at the mid to high end of our guidance ranges. Thank you for joining our call today. We would now be pleased to answer your questions. Operator: Ladies and gentlemen, if you would like to register a question, your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, please press 1 again. One moment for please for the first question. Our first question comes from the line of Mike Baker with D. A. Davidson. Please proceed with your question. Michael Allen Baker: Okay. Thanks. I'll have a few. Let me start with Sara, you said you said let me get the exact quote. All indicators, point to strong, results. So what if you could give us more detail on what these indicators are. And then the guidance so mid to high end of the full year range, Is that more bullish than when you originally gave the guidance? I could be wrong, but I don't remember you. I remember you giving a range on the fourth quarter, but not necessarily planning to mid to high end. So can you help me on that? Thanks. Sara K. Hyzer: Yeah. Sure thing, Mike. Nice to hear from you. So yeah, as we sit here today and look forward into the back half of the year with the activities that we have locked in place, we do feel highly confident in being able to get to that mid to high end of the range. And that really is just coming from the, you know, promotional activities that we have scheduled, and that we've been able to lock in even since year-end. So we're feeling really good about where The Americas is going to be landing the year. And some of the very variability will also be driven by Asia Pac's recovery in the back half of the year. So while they had a slower start, particularly in the marketing distributor markets, you know, when we're starting to look at the recovery starting in Q2, but most mostly that recovery will come in the back half of the year. Michael Allen Baker: Okay. And to follow-up on that, the, are you sounds like second quarter is off to a good start. It it Can we say are we specifically seeing a recovery in those Asia distributor markets? Or, I guess you sort of just said it. It sounds like it's maybe starting a little bit, but it's more in the back half. But but can we are are we seeing a recovery yet? Those Asia distributor markets? Steven A. Brass: Hey, Mike. It's Steve. So, we are. We're already seeing that beginning of Q1, and that's our expectation. So, we had a relatively softish Q1 overall. Q2, you're going to see stronger results, but then the real power comes in the back half of the year. And so as Sara is alluding to, we're going to have a US year like we haven't had in quite a while, a really strong year in The US, and that's the foundation. Are you European direct markets performing very, very well and we expect that to continue. It's really about those Asia distributor markets and that kind of Q4, Q1 kind of impact with that beginning to recover beginning in Q2 and then into the back half. And also our European marketing distributor markets recovering also. Michael Allen Baker: Got it. Let me sneak in one more. The buybacks, I so last year, bought back $12 million. I think at one point, you had said you expect it to double. Be about $24 million. But now you're saying you you expect to go through the entire, 30 another another $22 million this year. That that's more than a double, I think, if if my math is correct. Yep. Yeah. So so that's a more confident moment. Is that fair to say? Sara K. Hyzer: Yes. It's fair to say, Mike. That is good math, and, yes, I think we as as as soon as the window opened up, we the buybacks and really just have it phased to utilize the entire I think, just under $30 million availability up through the end of the fiscal year. Michael Allen Baker: Got it. Awesome. Thank you. Appreciate the time. Thank you. Steven A. Brass: Thank you. Operator: Our next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question. Daniel Rizzo: Hey, you guys mentioned taking reducing supply chain costs. I was just wondering if you can provide color on what specifically you guys are doing. I mean, are you I don't know, multi-sourcing more or or, yeah, just which is the steps you're taking? Sara K. Hyzer: Yeah. Sure. So we a couple years ago, we actually invested in not only a head of global supply chain, but also head of global sourcing. And so there's been some new thinking around how we source supply, and we started with cans. So some of the can reductions or the can reductions that you're starting to see impact the business in the back half of last year and into this year is really the result of a different way of thinking about sourcing more globally. And the next phase of that is going to be moving into to to the specialty chemicals area. So there are concrete actions that we are taking to look at how and where we are sourcing our raw materials from. In addition to that, there's a lot of activity happening on the supply chain side around how to take costs of the miles traveled for our costs out of or miles traveled for our product. Cost out of the system, along with a fresh look at the distribution network, particularly in The United States and making sure that we are the distribution center sorry. Making sure that we're taking a look at how we're where our distribution centers are situated. Again, with the idea of trying to reduce the mileage that our products are traveling. So there are structural changes that are in the works. Some of that won't impact the business until FY '27 and beyond, but we're really excited about the work that the supply chain team has really taken on in the last couple of years and starting to see that come to fruition. Daniel Rizzo: So with the increase in the distribution centers, would that suggest maybe that there's some come some CapEx spend or some sort of spend to kind of just include improve your footprint in different in various regions? That's my first question. And two, given these moves, is I I know your guidance is 55% gross margins, but it seems where we are now and maybe even a little above is is is annually achievable or sustainable for over the long term. Sara K. Hyzer: So I'll address the CapEx piece. Since it's a completely outsourced model, a lot of the investments, if we do have to make investments, are happening by our third-party providers. We may at times help supplement the cash investment that they have, but a lot of that doesn't qualify as CapEx from our perspective. So think our guidance of 1% to 2% from a maintenance CapEx standpoint is still going to be a very good target that we'll be landing within. And then secondarily, and of course, as I answer the CapEx question, I'm blanking on the second part of the question. I was just wondering given all the moves you're making with reducing costs fine. Operator: Yep. Okay. Sara K. Hyzer: Yeah. The 55%. So, I mean, we're sitting above 55% right now. I hate to commit to something over the long term as we are always subject to oil availability and just specialty chemical variability. But we are continuing to find opportunities for us to take costs out of the system. And so we believe you can see in the guidance this year, we believe that there's opportunities for us to get margin accretion even this fiscal year and some of those initiatives that we have in the pipeline. Are gonna benefit us in in in next fiscal year. So we'll we'll be able to obviously guide to next fiscal year as we get to the end of this year, but there is right now, we're fairly confident a strong gross margin. Daniel Rizzo: Alright. Thank you very much. Operator: Thank you. Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.
Operator: Good day, and welcome to the RPM International Fiscal Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Schlarb, Vice President of Investor Relations and Sustainability. Please go ahead. Matthew Schlarb: Thank you, Betsy, and welcome to RPM International's conference call for the fiscal 2026 second quarter. Today's call is being recorded. Joining today's call are Frank Sullivan, RPM's Chair and CEO; Rusty Gordon, Vice President and Chief Financial Officer; and Michael Laroche, Vice President, Controller and Chief Accounting Officer. The call is also being webcast and can be accessed live or replayed on the RPM website at www.rpminc.com. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties, which could cause actual results to be materially different. For more information on these risks and uncertainties, please review RPM's reports filed with the SEC. During this conference call, references may be made to non-GAAP financial measures. To assist you in understanding these non-GAAP terms, RPM has posted reconciliations to the most directly comparable GAAP financial measures on the RPM website. Also, please note that our comments are on an as-adjusted basis and all comparisons are made to the second quarter of fiscal 2025, unless otherwise indicated. We have provided a supplemental slide presentation to support our comments on this call. It can be accessed in the Presentations & Webcasts section of the RPM website at www.rpminc.com. As a reminder, certain businesses that were previously part of the Specialty Products Group have been reallocated to other segments effective June 1, 2025. As a result, all references today reflect the updated structure and prior year figures have been recast accordingly. There's no impact on consolidated results. Now I will turn the call over to Frank. Frank Sullivan: Thank you, Matt. Today, I'll begin with an overview of our results and cover some recent actions we've taken, followed by Michael Laroche, who will cover the financials in more detail. Matt will then provide an update on cash flow, the balance sheet and our recent acquisition. And then Rusty Gordon will conclude our prepared remarks with our outlook. As always, we'll be happy to answer your questions after our prepared remarks. Beginning on Slide 3, we achieved record sales during the second quarter, aided by our targeted growth investments. However, momentum slowed as the quarter progressed. We began the quarter with a solid September, actually better on the top line and bottom line than our first quarter results. Then the trend of longer construction project lead times became more pronounced, the DIY demand softened, particularly in late October and through November, resulting in sales declines for those months. The government shutdown contributed to this slowdown as we saw activity in certain construction sectors tied to government funding come to a near standstill and consumer confidence decline. All segments generated positive sales growth for the quarter. However, this was not enough to offset higher expenses, including growth investments and costs from temporary inefficiencies as we continue to consolidate plant and warehouse facilities, resulting in a decline in margins in the quarter. To better align our SG&A structure with current market demand, we are acting quickly to execute optimization actions across the organization. In many ways, this is an acceleration of the SG&A structural realignment we have been preparing as part of a new MAP 3.0 program. Importantly, we also continue to have focused investment in our highest growth opportunities. And on the following slide are some details about what we're doing. Turning to Slide 4, we estimate that once fully implemented, our optimization actions will yield an annual benefit of approximately $100 million. We have realized $5 million of the benefits in the third quarter with an incremental $20 million in the fourth quarter with the remaining $75 million in fiscal 2027. As we are currently in the process of implementing these changes, we will have an estimate of the implementation cost by the time of our next earnings call in April. We're also continuing our focused investments in areas where we have seen good returns and have opportunities for continuing growth. These include high-performance buildings, business intelligence and innovation. For high-performance buildings, we are expanding our technical sales force in areas like turnkey roofing and enhancing our system offering through acquisitions. As an example, we purchased an expansion floor joints company, HCJ in fiscal 2025, which along with our other complementary RPM products enables us to meet the demanding requirements of high-performance floors. We expect additional acquisitions to expand our system offering similar to the recently announced agreement to acquire Kalzip, which Matt will speak to in a few minutes. We're also investing in improved business intelligence. This includes capitalizing on The Pink Stuff's expertise in leveraging data to develop targeted marketing campaigns across multiple RPM businesses. Additionally, following several years of ERP integrations, we have been investing in business intelligence to better utilize data company-wide. It is helping to guide decisions and actions in areas such as marketing, pricing and operations. Finally, innovation has been a core element of RPM's historical growth and through investments in people and facilities like our Innovation Center of Excellence, we have enhanced our product offering across our segments. One example is AlphaGuard PUMA, which is leading waterproofing technology and can be installed at temperatures as low as minus 20 degrees Fahrenheit. Another example is EucoTilt WB. It is a newly introduced water-based bond breaker that provides a clean separation of panels along with other benefits in the growing tilt up construction market. In summary, we are accelerating actions to optimize SG&A levels in response to soft market conditions while remaining focused on supporting our best growth opportunities. With our growth investments and the quality of our people, we remain well positioned to continue outpacing our markets, particularly as markets rebound. Lastly, in addition to the actions we announced today, we're in the process of developing our MAP 3.0 program and expect to provide details at our Investor Day event after the conclusion of our 2026 fiscal year. I'll now turn the call over to Michael Laroche to cover the financials. Michael Laroche: Thank you, Frank. On Slide 5, consolidated sales increased 3.5% to a record driven by acquisitions and engineered solutions for high-performance buildings, partially offset by continued DIY softness and longer construction project lead times, partially due to the government shutdown. Adjusted EBIT declined as top line growth and MAP 2025 benefits were more than offset by higher SG&A expenses from growth initiatives, M&A deal costs, health care and temporary inefficiencies from plant and warehouse facility consolidations. Adjusted EPS declined driven by lower adjusted EBIT and higher interest expense resulting from higher debt levels to finance M&A activity. Geographic results are on Slide 6, with Europe the fastest-growing region, driven by M&A and FX. North America grew approximately 2% as an increase in high-performance building solutions, partially offset by soft demand in DIY and in Canada. In emerging markets, growth was led by Africa and the Middle East as they continue to have success serving high-performance building and infrastructure projects. Moving to Slide 7. Construction Products Group sales grew to a record led by solutions for high-performance buildings. Project lead times lengthened as the quarter progressed, driven by the extended government shutdown. Additionally, weak sales in the disaster restoration business due to lower storm activity this year was a drag on growth. SG&A growth investments, temporary inefficiencies from plant consolidations and lower fixed cost absorption at businesses with volume declines more than offset MAP 2025 benefits and led to a decline in adjusted EBIT. Next, on Slide 8. Performance Coatings Group achieved record sales with broad-based growth across its businesses. Acquisitions also contributed to the growth. Adjusted EBIT was approximately flat as higher sales and MAP 2025 benefits were offset by growth investments and unfavorable mix. Consumer Group results are on Slide 9. M&A and pricing to recover inflation drove the sales growth as volumes declined due to soft DIY demand, particularly in November. Additionally, some sales were delayed as a result of software system implementations and the transition to a shared distribution center in Europe. Continued product rationalization also negatively impacted sales. Adjusted EBIT declined due to lower volumes, temporary inefficiencies from footprint consolidation and start-up of the shared distribution center in Europe. Additionally, lower demand at the Color Group also weighed on margins. In our cleaners business, the integration of the Star Brands Group, the parent of The Pink Stuff remains on track. However, we reversed a $12.7 million liability associated with an earn-out for this acquisition. This earn-out liability was originally calculated based on a probability weighted sales forecast, and much of the value was driven by more aggressive sales scenarios. Current forecasts are more in line with our base case assumptions and the aggressive targets needed to achieve the earn-out are unlikely to be met, which is driving a reversal. This $12.7 million gain has been excluded from our adjusted EBIT. Now I'll turn the call over to Matt, who will cover the balance sheet and cash flow. Matthew Schlarb: Thank you, Mike. Starting with cash flow from operations on Slide 10. It was up $66.3 million in the second quarter compared to the prior year with the increase attributable to improved working capital efficiency. This is the second highest second quarter in the company's history and helped us pay down $127 million in debt in the first half of the year, and that's in addition to returning $169 million to shareholders through dividends and share repurchases and spending $162 million on acquisitions. We are proud that in October, we increased our dividend for the 52nd consecutive year. This is a testament to our steady cash flow and our strategically balanced business model and focus on maintenance and repair. Liquidity remains strong at $1.1 billion, and combined with the strong balance sheet, we have a high level of flexibility in capital allocation decisions. As an example, yesterday, we announced an agreement to acquire a company that will strengthen our systems offering for high-performance buildings that Frank discussed earlier. Turning to Slide 11, you'll see more information on the agreement to acquire Kalzip. They are a German-based leader in metal-based roofing and facades, which is a fast-growing part of the construction market because of their durability, lower maintenance and high performance. The incorporation of Kalzip products into our existing offerings will strengthen CPG's ability to provide building envelope systems that enhance efficiency, durability and aesthetics, while also meeting or exceeding demanding specifications. The company had calendar year 2024 sales of approximately EUR 75 million, and the acquisition is expected to close in the fourth -- fiscal fourth quarter of 2026. Now I'd like to turn the call over to Rusty to cover the outlook. Russell Gordon: Thank you, Matt. Our outlook for the third quarter can be found on Slide 12. Market conditions are expected to remain sluggish with soft DIY demand and continued longer lead times for construction projects. We are encouraged to see that construction pipelines remain solid, although visibility of when this pipeline converts to actual construction activity remains unclear. Despite these macro challenges, we expect to outgrow our underlying markets. Thanks to the targeted growth investments we have been making. We will also benefit from the implementation of SG&A focused optimization actions, as Frank mentioned, although in the third quarter, that will be offset by continued health care inflation and an M&A deal expenses. Overall, we expect consolidated sales to increase by mid-single digits in the quarter. By segment, Consumer is expected to grow sales moderately more than PCG and CPG due to acquisitions. We anticipate adjusted EBIT will grow mid- to high single digits during the quarter. Moving to our fourth quarter outlook on Slide 13. We expect sales to grow in the mid-single-digit range. With our solid construction project pipeline, we expect some of the projects that were recently delayed to convert into activity by the end of the year. Also, if weather delays some projects from the third quarter, as we saw last year, we expect most of these to be realized in the fourth quarter. We will continue to benefit from acquisitions and the targeted growth investments we have been making, along with our resilient repair and maintenance focus and ability to sell engineered systems and solutions to high-performance buildings. In the fourth quarter, we'll also see more of the incremental benefit from the SG&A focused actions that we are currently implementing and should more than offset higher health care and M&A deal expenses. Taking all of this into account, we anticipate adjusted EBIT in the fourth quarter will be up low to high single digits with volume growth being the key variable. This concludes our prepared remarks, and we are now happy to answer your questions. Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird. Ghansham Panjabi: So I guess starting off with maybe Slide 3 where you have the organic sales breakdown during the quarter. I know it can vary quite a bit on a monthly basis depending on comps, et cetera. But could you give us a bit more color as to how the business has specifically performed? The 3 operating segments was -- just trying to get a sense as to whether the deterioration was specific to Construction and then also Consumer or the Performance also get impacted? Frank Sullivan: Sure. So if you look at -- this is kind of unique, and I don't expect us to do this very often in the future. But when we provided guidance on our last investor call, the latest information we had was in September. And the unique element is talking about months, which we are in this call. Actually, in September, we saw margin improvement and solid growth at the Construction Products Group and the Performance Coatings Group and some continued weakness, which has been pretty prevalent across the whole peer group in Consumer. Pretty much across the board as we got into the back half of October and into November, we saw a deterioration across all 3 of our segments. Ghansham Panjabi: Got you. And then in terms of the $100 million SG&A initiative that you outlined, how much of that should we assume is temporary versus permanent? And is that just a reappropriation of spending relative to the previous growth investments? I'm just trying to get a sense as to whether you've curtailed some of those growth investments as well, just given the change in the operating conditions. Frank Sullivan: Sure. As you know, we've been working on a new MAP 3.0, not sure what we're going to call it yet. And like a lot of folks have kind of put off longer-term forecasts in the midst of all the tariff disruptions and other elements. It's our expectation, regardless of where the markets are that we would provide details this summer, whether it's on our July call or perhaps an Investor Day. So we have been preparing for that with our leadership team and our Board. So to a certain extent, the disappointing kind of market downturn, which is hopefully temporary, accelerated some of our thinking there. The $100 million is roughly $70 million in personnel-related RIFs across the globe and about $30 million in discretionary expense reductions. Operator: The next question comes from Matthew DeYoe with Bank of America. Matthew DeYoe: The fiscal 3Q and 4Q guidance seems to imply much better incremental margins, maybe not great, but certainly better than where we were. Can you help provide a little bit more confidence as to the rate of change of the fixed cost absorption as we move through fiscal 3Q and into 4Q? Frank Sullivan: Sure. So a couple of things. Number one, we're rounding easier comps, and so that will certainly help us. Secondly, the structural SG&A actions that we announced today and that we are implementing as we speak, will add to that leverage in ways that we weren't seeing in the first half of the year. And then I think secondly, with some improvement in unit volume growth, which we anticipate, you'll see a reversal in absorption, which hurt us mightily in Q2 as unit volumes declined in October and November. And to the extent they improve in the third and fourth quarter, that will be a nice swing both versus Q2 and also last year. Matthew DeYoe: All right. And as I think about some of the acquisitions that are starting to layer in at a decent clip here. I mean, how should we think about EBIT accretion from this? Is this -- are these deals kind of like non-EBIT accretive given D&A write-up? Or is it at margin, above margin? How should we think about the layering in there? Frank Sullivan: Sure. It takes some time for these to get integrated into -- particularly in our Construction Products Group, where most of these have happened. One of the areas for real possible strength for us in the second half, for instance, is Pure Air. It was an HVA (sic) [ HVAC ] reconditioning and rehabilitation project or product system that we acquired a couple of years ago. It took us longer than we thought to get properly certified in every state, and we are starting to get traction there. And so I think an 18-month to 2-year cycle is the right way to think about, for instance, at Kalzip, high-margin, unique metal roofing business in Germany, both some basic core stuff that we're in, in terms of metal roofing and some high-profile projects, principally a European business. So back to that 18 to 24 months, I think that's the right time frame to think about how we can integrate that into a Tremco CPG distribution and sales effort more globally. Matthew DeYoe: I guess I appreciate that from an operating integration perspective, but would that also kind of align with earnings accretion as well? Frank Sullivan: Absolutely. So in the early years of a Pure Air, not really accretive. And I believe as we get into calendar '26, and certainly, the back half of fiscal '26, what's a relatively small acquisition will be nicely accretive. Operator: The next question comes from Arun Viswanathan with RBC Capital Markets. Arun Viswanathan: I guess I just wanted to ask about maybe some of the transitory costs you guys incurred this quarter. How much would you attribute maybe to the government shutdown and as well as SG&A -- increased SG&A spending? And how do you see that trending as you go forward? Russell Gordon: Sure, Arun. This is Rusty here. In terms of some of the transitory costs, we did get hit hard on absorption and higher conversion costs. Part of that is due to the plant shutdowns going on and transition of facilities. We also opened up a shared distribution center in Europe with some inefficiencies at the outset, which will be resolved as we get up to speed there. So in total, we lost almost 1 percentage point in margin just on higher conversion costs. Some of that was volume driven, maybe $4 million, $5 million of that was due to transition of facilities, whether it's shutdowns or changes in distribution. So hopefully, that gives you some color. Arun Viswanathan: Great. And as you look out maybe into the second half of fiscal '26 and into '27, what would be the run rate on some of the savings? I know that you will capture a portion, as you said, maybe $5 million here in the third quarter. But when do you expect to see the full amount of that savings kind of flowing through the P&L? Frank Sullivan: Sure. I think the full amount will start to flow through in Q1 of '27. We are executing as we speak, what will be about a $25 million per quarter run rate. And we would expect most of that activity to be completed and announced internally by the end of Q3. Operator: The next question comes from John McNulty with BMO Capital Markets. John McNulty: Maybe a question on the 4Q outlook because 3Q is so seasonally light, it probably doesn't matter all that much. You've got a pretty wide range, low single-digit to high single-digit growth in EBIT. And I know in some prepared remarks, you commented that it's largely contingent on volumes. Is the high end of the range assuming the world starts to feel better again? Or is that just the recapturing of maybe some lost business around the government shutdowns? I guess maybe you can peel back the onion a little bit in terms of what gets you to the low end of that range and what gets you to the high end? Frank Sullivan: Sure. As for the lost business relative to government shutdown to the extent that's real, I would expect us to see that pick up in Q3. Q4 really is about volume. We will be rounding 2 years of challenging consumer takeaway unit volume growth in Consumer. So we'll be seeing easier comps there. Part of the changes we've made with this SG&A structural realignment in our consumer business with what we hope will be a positive effect to margin and the bottom line. And we have a really strong backlog in our industrial business in both CPG and PCG. If that becomes to be realized, again, you'll see us have a pretty good fourth quarter. But given the volatility that we're experiencing just in this quarter, a really solid by any measure September and then a really disappointing by any measure November, makes us a little hesitant to be more specific about coming months because that volatility seems to be continuing. John McNulty: Okay. Fair enough. And then I guess, just given the general weak environment that continues, if anything, maybe it got a little bit worse overall. I guess, can you speak to what you're seeing from a raw material perspective? Are you starting to see any signs of relief? I know tariffs kind of made that a little more difficult over the last few quarters. I guess, what is your outlook as you're looking forward? Frank Sullivan: Sure. I'll let Matt provide some specifics. But generally, the trends that we're seeing both in the marketplace and geopolitically suggest that, that should be a tailwind for us in the second half of the year. Matthew Schlarb: Yes. So absent tariffs, yes, we are seeing raw material inflation coming down and even turning into deflation, but you have these pockets of inflation in some of the categories we've talked about in the past, that continues. So these are really tariff-driven. So looking at metal packaging, that's up low teens. Epoxy resins are actually up high single digits. And then we have some specific categories that really can only be sourced from Asia. These are more niche products, not a huge dollar spend, but when you're facing tariffs of 20%, 30%, 50%, it can add up. And so all in all, taking all into account, we expect a little bit of inflation in the third and fourth quarter, but that's all tariff-driven. Frank Sullivan: And again, I think geopolitically, where underlying base chemicals are going, we would expect that to be a tailwind. And as we get into Q4 and certainly into fiscal '27, we will be annualizing the impact of tariffs, for instance, on steel packaging. John McNulty: Okay. Got it. Fair enough. And maybe if I could slip in one last one. Just on The Pink Stuff earn-out, I know there were kind of a wide range of outcomes in terms of how much you kind of felt like you could really drive that business. I guess what now are the base expectations since you took down that earn-out a bit? I guess, how should we be thinking about where that business can go over the next few years? Frank Sullivan: Sure. The Pink Stuff acquisition is on track for our base case as Mike alluded to. The earn-out was a relatively short 2-year earn-out, and it was based on double-digit unit volume growth. And in this environment, we are not hitting double-digit unit volume growth, and we don't expect to in calendar '26. And so that was the basis for the reversal of the earn-out. Operator: The next question comes from Patrick Cunningham with Citi. Patrick Cunningham: Just on the weakness in Consumer Group, how much would you attribute to underlying market softness versus some of the other things you called out like sales delays or targeted product rationalization? Frank Sullivan: I think most of it has been underlying consumer takeaway. And again, it got weaker. It picked up a little bit in September. We had solid results across all our businesses in that month. And then it got weaker in the quarter as it progressed, Understanding how much of that is government shutdown and other issues, it's hard to know. We're also approaching year-end for a lot of the major retailers. So there continues to be working capital inventory management levels there. As I said earlier, we will be rounding as we get into calendar '26, 2 years of easier comps. And so I think we will see better results in the second half of fiscal '26 and better results in fiscal '27 for Consumer. We don't need a roaring comeback to start seeing unit volume going in the right direction, which will accrete to our bottom line nicely. Patrick Cunningham: Understood. And then just on price realization, where did price shake out in fiscal 2Q? And has there been any tension on getting full realization in the Consumer Group given the weak demand environment and some disinflation on the raw side? Frank Sullivan: Price was less than 1% in Q2. And I would anticipate about the same in Q3, unless, of course, we see any material spikes. And we have not had a real challenge over the last couple of years in terms of getting price where needed. In Consumer, in particular, we did bump into some price elasticity issues relative to price points at retail, and we have adjusted accordingly. That was really a spring of '26 -- I'm sorry, spring of '25 phenomenon, not Q2. Operator: The next question comes from Mike Harrison with Seaport Research Partners. Michael Harrison: Was hoping that we could just dig in a little bit more on this impact from the software system implementation in Consumer sales, and it sounds like maybe EBIT, too. Is that implementation now complete? Or should we still expect maybe some delays or impacts in Q3? And I guess to the extent that sales were delayed, are you realizing those sales then in Q3? Or is it going to take longer for those sales to materialize? Russell Gordon: Yes, Mike, this is Rusty here. Yes, that was temporary. We have resolved that. It was a simple matter of new systems as well as a new warehouse in Europe. The new system was implemented in a couple of places in Consumer. But we are up and fully running. So yes, that was a temporary situation. Michael Harrison: All right. And then within the Performance Coatings business, you noted broad-based growth really across that business. I was hoping you could give a little more color on what portions of the business are particularly encouraging to you as you look out over the next few quarters. Frank Sullivan: Sure. Our Stonhard flooring business is continuing to grow nicely, really industrial capital spending and onshoring. Fiber grade is benefiting from a lot of the data center build-out. A lot of their functional systems are used in multiple areas there. And so those are 2 probably the strongest areas. And we're also picking up some market share, a little bit of expensive margin in our Carboline business. Operator: The next question comes from Frank Mitsch with Fermium Research. Frank Mitsch: I must say I am a fan of the granularity that you provided in Slide 3. Obviously, it shows a -- how the quarter started out pretty good, therefore, leading to some optimism in terms of the quarter, fiscal second quarter, but then deteriorated in October and November. That trend does not look like to be your friend. Here we are on January 8. How did December turn out? Frank Sullivan: Sure. Well, as I said earlier, it's not been our habit, and I'd like very quickly in the next earnings call to get off this habit of talking about monthly results, but December is over. And herein lies the conundrum of volatility, our December sales were up 12.1%, unit volume was up 7%. And so how much of that is a pickup of Q2 government shutdown related recovery? And how much of that is underlying strength in the areas that we're continuing to invest in, was actually across the board. So we did see a little pickup in consumer, but a significant pickup in construction products in our roofing business. So we're off to a great start in December. The challenge we have is understanding what that number means. And how much of that is really a pickup of what was a temporarily weaker Q2, how much of that indicates that things are moving in the right direction. It's anybody's guess as to whether January and February will look like December or whether they'll look like November. And so I think that's why we have the wider range that we have in our Q3 and Q4 forecast. Frank Mitsch: Wow, that's -- I did not expect that answer. And let me drill down just a little bit. I know you're not in the habit of giving monthly sales, but I'm just curious, it begs the question, is there anything with the year ago result? Was there an artificially depressed December of '24? Was there a super November of '24. Is there anything in the year ago comps or -- that would have led to the negative [ 6 ] November, positive [ 12 ] December? Or this is really the kind of underlying business as you see it right now? Frank Sullivan: You'll recall, we had a weak third quarter last year. A lot of that was winter weather related. So certainly, we're rounding some easier comps. And I think that's a part of why we're confident in the second half, albeit within a range of generating solid sales and earnings growth in Q3 and Q4. And so that's part of the answer. Operator: The next question comes from John Roberts with Mizuho. John Ezekiel Roberts: Aside from disaster restoration, would you say that weather was not a factor in either the quarter or December so far? Frank Sullivan: No. I think weather was a factor. We got hit pretty hard across the country in the Thanksgiving, kind of late November period with heavy snow and that continued into December. We're certainly seeing a relief in that right now. And so I don't expect year-over-year for that to be a big issue in Q3 because we got clobbered last year. And so year-over-year, I think the trends are moving in the right direction, both versus easier comps, how we're starting the quarter and the impact of the acceleration of our SG&A realignment, which will not necessarily impact Q3 much. It will impact Q3 in the last month but will start to be realized more fully in Q4. John Ezekiel Roberts: And do you compete at all against BASF's industrial coatings business or any of the areas of overlap between Axalta and Akzo's industrial coatings businesses. I don't perceive there's a lot of opportunities for share gain as there's maybe some disruption across those businesses. But is there -- are there any key areas of overlap? Frank Sullivan: We have a $400 million high-performance industrial coatings business that's part of our Performance Coatings Group. They're really focused on wood stains and finishes. We have a real nice market share in what's left of that business, cabinetry, doors, windows in North America. And that business is actually growing. We're picking up share in a couple of places. It incorporates our TCI Powder Coatings business as well as a small but growing OEM liquid metal business. And so that's an area where I would expect us to continue to grow. We reorganized that into a comprehensive business from about 4 or 5 different separate pieces. And that reorganization, what we're doing at the R&D center in Greensboro, which is primarily owned by our RPM OEM coatings business is actually a bright spot for us right now despite economic problems. Operator: The next question comes from Kevin McCarthy with Vertical Research Partners. Kevin McCarthy: A question on M&A. Can you talk through why you decided to pursue Kalzip? And then more broadly, if I look at the recent acquisitions, many of them are domiciled in Europe. And I was wondering if you could speak to that. Is that strategic on your part or just simply a function of where you're seeing the best value or opportunities now? Frank Sullivan: So the simple answer is yes to both, very strategic, but in M&A, it's also what's available for sale at a value that makes sense for us. We sell tens of millions of dollars of purchase for resale, metal roofing in the U.S. And we have been looking for opportunities to enhance that purchase for resale with stuff that we own and control. Kalzip is a unique asset, German-based. Their specialty is actually a lot of high-profile projects, which we're not in. And so we're pretty excited about the ability to take some of their patented technology, bring it to the U.S. and accelerate the metal roofing elements of what some of our Tremco Roofing salesmen are already selling as well as helping to expand that metal roofing capability globally. Kalzip has had projects in Europe, Middle East and Asia, areas where our Tremco Roofing business is not really present. So we're pretty excited about it. As I commented earlier, it's a real strategic play. It's going to take us some time to take that technology and bring it into the U.S. But when we do, the opportunities for us to add tens of millions of dollars or more in the U.S. market where we have an awesome sales force on top of what's about a EUR 75 million revenue business is something we're pretty excited about. Kevin McCarthy: Very good. And then secondly, if I may, I wanted to revisit the subject of pricing. I think you said in response to a prior question that the price contribution was less than 1% in the quarter. And I was somewhat surprised to hear that. My recollection was that you were targeting higher contributions and acceleration into the fiscal second quarter. So just wondering if you could just unpack that and talk a little bit about where you're seeing the most and least traction and maybe segment contributions and whether or not you might anticipate any acceleration on price in the back half of the year? Frank Sullivan: Sure. Again, it will be circumstantial. We're past the period of heavy inflation that drove price increases meaningfully across all of our businesses. And so in the quarter, less than 1%, but we got more price in Consumer because that's the place where we're having the biggest challenge. Again, it's the place where metal packaging has got the biggest impact across RPM. And then selectively, for instance, around epoxy resins and a few other places, we're getting price in selected product categories but not across the board like we were a few years ago. Operator: The next question comes from Mike Sison with Wells Fargo. Michael Sison: I guess, with your outlook for the third and fourth quarter for sales growth, how much are you expecting that to be organic sales growth and acquisitions? And I know you have a lot of acquisitions in there. So just curious if you had sort of a feel for how much organic growth is embedded in the third and fourth quarter sales outlook? Frank Sullivan: [Technical Difficulty] Okay. I think we're back on, a temporary drop there. In response to Mike Sison's question -- can you hear me? Michael Sison: Yes, I can hear you, Frank. Frank Sullivan: Okay. Thank you. So I'll just point back to the monthly information we provided. You saw what we talked about in Q1. We talked about on Slide 3, the unit volume growth month by month, September, October, November. I just provided it for December. And it's our expectation that the focused growth investments that we are talking about drive organic growth. That's how we're going to leverage to the bottom line. And we provide quarter-by-quarter, the breakout between organic growth, FX and acquisitions. But it's our expectation that we will be seeing better organic growth in the second half as a result of the comments we've made earlier, easier comps, focused growth investments and hopefully, some improvement in market dynamics. But given the volatility we're seeing, again, it's anybody's guess as to whether January and February and subsequent months, look like November or December that were starkly different and perhaps a little bit of an average given the impact of the government shutdown. It's hard for us to know what that is. But I can tell you for us in every business, the negative impact of the shutdown was greater than 0. Michael Sison: Got it. And then I guess for the third quarter, with the outlook being mid-single digits and December doing pretty strong. I mean does that imply that January and February has tough comps and might be negative? Or do you think we'll just be positive for the rest of the way? Frank Sullivan: I think we'll be positive, but I don't know. And we will learn in January, for instance, how much of the real strength in December was picking up lost business in Q2 because of the government shutdown or how much of it is a release, for instance, of some of the good backlog that we continue to build in our Construction Products Group and our Performance Coatings Group. And so if we had higher confidence, we'd be putting out maybe a better forecast. But given the volatility we're experiencing, it's hard to know as we sit here today. Operator: The next question comes from Josh Spector with UBS. Joshua Spector: I just have 2 quick follow-ups here. First, just going back to the transitory costs. I think last quarter, you guys framed it at about $30 million, and you had roughly equal buckets between health care, some of the plant consolidation and then SG&A growth. Is that the right number that was in the August quarter? And can you help us think about what that looks like over the next couple of quarters? Russell Gordon: Sure. Yes. Josh, looking at second quarter, health care was still an issue. We had probably in the $6 million, $7 million range of higher health care costs. In terms of the impact -- unfavorable impact on conversion costs, like I mentioned, that was about 1% of sales hitting our margins. So that's close to $20 million. And what was the third category you talked about? Joshua Spector: I believe you had the plant consolidation, the SG&A investment, I think, is the third one. Russell Gordon: Yes. The SG&A investment is continuing, of course, on a more selective basis given the risk activity we're talking about. Joshua Spector: Okay. I guess then just on that last point with the SG&A. I mean, someone asked earlier about your saving cost, your investing, are you then investing less in some of the savings? Is that you're moving people around there? Or are you cutting people around that? And I think just one other follow-up to sneak in there is that you said the cash costs, we won't know until April, I believe, but you think those costs are going to be ramping up over the next couple of months. So would there be like a $60 million, $70 million charge for that coming up shortly? Frank Sullivan: Yes. The details we'll provide in April, but 2/3 of that will be realized here in the next few weeks and 1/3 will play out into the spring, particularly related to notice provisions and things like that in certain countries outside of the U.S. In terms of your earlier question, some of our expense reduction activities on a gross basis will be higher than the numbers we provided. And then we are reallocating some of those dollars into our best opportunities for growth. And so certain of this is expense reduction and a structural realignment that we have been working on for some time. Given the challenging performance in October and November, we saw that as an opportunity to accelerate that. And others of it is a reallocation of growth capital in our P&L from certain areas that aren't growing to areas that are growing nicely, and we continue -- we intend to continue to support that. Operator: The next question comes from David Begleiter with Deutsche Bank. David Begleiter: Frank, staying on the cost issue. Of the MAP 3.0 savings, how much is being pulled into this program? Is it the majority? Is it a minority? Or is it a large amount? Frank Sullivan: As we've laid out, the plans that we're executing today on a net basis will have about $100 million impact, $75 million of that will be a net additional to fiscal '27, and then we will provide more detail, as I said, either in our July call or in a separate Investor Day about the details of MAP 3.0 that will incorporate manufacturing efficiency, procurement as well as a more methodical approach to SG&A. And so it will be at least $75 million, but likely higher. But again, the details will be provided this summer. David Begleiter: And of these costs you laid out today, how much are manufacturing versus SG&A? And are you closing plants? Obviously, you're firing people, but what functions are those people doing today? And how are they being replaced? Frank Sullivan: So in some instances, it's a reallocation of certain spending from one place to another. Of the $100 million, probably $10 million or $15 million will impact cost of goods sold, but the balance of it will be in SG&A. And again, in terms of more specifics, we'll provide it in April as we are in the midst of executing right now. Operator: The next question comes from Vincent Andrews with Morgan Stanley. Vincent Andrews: If I could ask on the government -- on the government shutdown, can you just talk a little bit about how much of your sales are sold directly to government contractors in the different segments versus sales to traditional customers that are working on projects might be funded by the government? Are we talking 5% plus or minus? Is that the order of magnitude? And so when that goes to 0, it's meaningful. Maybe we could start there. Frank Sullivan: Sure. We don't sell a lot direct to the federal government. A lot of it has to do with state and local spending that's tied to some government subsidies. So for instance, in schools, there are a number of state and federal programs, education, particularly impacting our Construction Products Group. Probably 20% of their revenues is tied to the education market. And so you saw both government shutdown-wise and, let's call it, Washington dysfunction-wise, some dynamics that froze the different funding elements of public education. We're starting to see that unfreeze, which is a good thing. And so it's more the follow-on effect of education funding and some infrastructure as opposed to any specific direct business. We don't do much, if any, direct GSA business, for instance. Vincent Andrews: Okay. That's helpful. And then on the $100 million, if you could just help us think about how that's going to be spread across the 3 segments, that would be helpful. Frank Sullivan: Sure. We'll provide that detail in April. We are in the midst of executing and people deserve to understand what's happening within RPM before people hear it publicly. It's pretty much that simple. Operator: The next question comes from Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: In fiscal 2025, your SG&A growth was pretty flat. And for the first 2 quarters of the year, it's up about 10%, which is about $50 million a quarter. Can you speak in general to what exactly has happened? And when you talk about a $100 million reduction in SG&A, what are you trying to accomplish with this? What's happening to the overall rate of your SG&A growth? Frank Sullivan: Sure. I would tell you, broadly speaking, in terms of expenses, I think of it as in 3 categories. One is some higher corporate expenses related to health care, insurance, and in particular, which is extraordinary M&A. We've done a lot of M&A transactions overseas, and they have a higher complete -- cost rate versus what we do in the U.S. And so that's part of it. The second one is some of the follow-on to the MAP initiatives in terms of finalizing plant consolidations and/or consolidating distribution and warehousing. I'll give you one example of what that is practically. The largest North American plant -- actually, the largest plant globally for Tremco was in Canada. We sold that plant 2 years ago and have had a window to move all that production to mostly United States. It has nothing to do with geopolitics. It was a plant that was in the sticks 30 years ago and suburban Toronto has been surrounding that plant. And so we had an opportunity to sell that for a nice price, recognizing we were getting regulatorily moved out of that space. We are incurring duplicate inventory. We are incurring duplicate production costs as we move that mostly from Toronto to Georgia and Texas and that should be completed by the end of March. So that is the type of duplicate conversion costs that we're seeing there. We're also seeing it in Europe and in parts of the U.S. as we consolidate distribution, all of which should make us more efficient in the future, but which right now is hurting us. And then the third category, Jeff, is what we've talked about, growth investments. We had a deliberate belief that we could invest in certain areas after frustrating 1.5 years of low growth, no growth or 2 years of low growth, no growth environment. And that was proving true through 5 months. We had better growth rates in most categories than our peers. September reinforced that because sales, organic growth and leverage to the bottom line was actually better than Q1. And for some reasons, we understand and some reasons, we're just guessing at that fell apart in October and November. Last comment I'll make is that the structural SG&A changes are things that we've been working on for some time. And as I commented, we made the decision to put off communications on a new long-term strategic plan until this summer. So a lot of this is work in progress as opposed to a quick reaction to a short -- hopefully, a short-term temporary downturn. Jeffrey Zekauskas: And then quickly, for your acquisition effects in fiscal '26, are they accretive to your margins? Or do they trim your margins? Frank Sullivan: So in fiscal '26 -- end of fiscal '25 and fiscal '26, they have hurt our margins. Most of that is transaction costs. We have significant transaction costs, for instance, on The Pink Stuff and Ready Seal that was at the end of last fiscal year and into the first quarter. Most of these small transactions that I've talked about have been overseas in our Construction Products Group. We're very excited about them, but they carry a relatively higher transaction cost in terms of legal fees and due diligence fees relative to the size of the revenues. Excluding transaction costs, which, of course, flow through our P&L, they're modestly accretive, and we expect them to be very nicely accretive in the coming years. But for the first half of fiscal '26, they have hurt us and been dilutive principally because of the high cost, and we referenced that as part of the higher corporate expense. Operator: [Operator Instructions] The next question comes from Aleksey Yefremov with KeyBanc Capital Markets. Aleksey Yefremov: I think you mentioned earlier, backlogs remain healthy. So should we take it as your backlogs today are same or higher than 3 months ago? Or have your backlogs declined? Frank Sullivan: So our backlogs are stable in our Performance Coatings Group and our backlogs continue to grow in the Construction Products Group. Aleksey Yefremov: Got it. And in terms of facilities consolidations, I mean you talked about first half of this fiscal year, could you give us any sense of what to expect in terms of future actions in the second half of '26 and perhaps in '27, even directionally, are facilities consolidations going to continue at about the same pace or higher or lower pace of costs related to these actions? Frank Sullivan: So we're developing that. And again, details on a broader longer-term approach are something we expect to communicate publicly this summer. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Frank Sullivan, Chairman and CEO, for any closing remarks. Frank Sullivan: Thank you, and thank you for participating on today's call. We're executing an SG&A structural realignment that we see as a down payment on our new long-term strategic plan. We look forward to providing details on a new MAP 3.0 later this year. In the meantime, we are focused on outgrowing our underlying markets and controlling what we can. This strategy will help us navigate the current economic challenges and volatility and position us for outperformance as markets recover. Thank you again for your participation on our call today, and we wish everybody a happy new year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the AZZ Inc. quarter 3 Full Year Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Phillip Kupper with Three Part Advisors. Please go ahead. Phillip Kupper: Good morning. Thank you for joining us today to review AZZ's third quarter fiscal 2026 results for the period ended November 30, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note the live webcast for today's call can be found at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Either nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call we'll discuss non-GAAP financial measures, which should be considered supplemental, not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Fergus. Thomas Ferguson: Thank you, Phillip. Thank you all for joining us today, and Happy New Year. After I provide a brief overview of our results and an update on what we are seeing across our segments, Jason will cover AZZ's detailed financial results, and Dave will discuss industry dynamics across our end markets. First, let me share a couple of important milestones. We achieved record sales of $426 million in the third quarter, surpassing any quarter in our company's history. And we had a record high trailing 12-month adjusted EBITDA of $358 million. These financial results reflect our unwavering commitment to execute on our disciplined strategy that focuses on driving growth and creating shareholder value. This quarter, we maintained our cash dividend of $0.20 per share, marking 63 consecutive quarters of consistently returning capital to our shareholders through cash dividends. Now turning to our third quarter results. We grew total sales by 5.5% and generated a robust adjusted EBITDA of more than $91 million. Metal Coatings delivered an exceptional quarter, with sales rising 15.7% year-over-year, fueled by higher volumes and strong demand from infrastructure projects. Segment EBITDA margins of 30.3% reflect an increased mix of larger projects in electrical, solar and transmission and distribution work, which tend to be more price competitive. Precoat Metals delivered sequential improvement over the prior quarter, though sales were down 1.8% year-over-year. This was primarily the result of continued softness in construction, HVAC and transportation markets. Meanwhile, food and beverage container demand reached new record highs, driven by new customer acquisitions and market share gains. This trend further underscores the accelerated shift from plastics to aluminum, which aligns with the ongoing ramp-up at our new Washington, Missouri facility. Overall, the increase in end market demand was driven by growth in infrastructure modernization, energy transition and industrial reshoring along with data center construction, integrated LNG power generation and renewable energy projects. These market sectors depend on galvanized steel and coated materials, areas where AZZ offers unmatched scale, coating solutions expertise, and exclusive technologies to deliver exceptional value to our customers. Our diversified portfolio positions us uniquely to seize project opportunities across multiple end markets. Dave will share more details on this in a moment. We continue to emphasize AZZ's proprietary ERP platform as a core differentiator within our business model. Our Digital Galvanizing System and coil zone platforms deepen customer relationships and reinforce our competitive moat while providing durable returns on invested capital. Operationally, the systems are margin enhancing through higher throughput, improved yields, better zinc utilization, improved administrative and production efficiencies and increased customer connectivity. Importantly, these benefits are achieved with limited incremental capital, making our technology investments highly accretive to ROIC, while also reducing waste and supporting more sustainable operations. Subsequent to quarter end, AVAIL completed the sale of a majority interest in its Welding Solutions Business, which they refer to as WSI. The transaction creates value for shareholders and further simplifies AVAIL's portfolio. Our joint venture partner remains focused on completing additional divestitures with only the Rig-A-Lite and a small portion of international WSI business left. With that, I will turn it over to Jason. Jason Crawford: Thank you, Tom. For the third quarter, we reported record sales of $425.7 million, representing a 5.5% increase from $403.7 million in the prior year period. The growth was led by our Metal Coatings segment, where sales increased 15.7% year-over-year, driven by higher volumes and infrastructure-related spending across our largest verticals. Although Precoat Metals sales improved sequentially from last quarter, sales were down 1.8% from the same quarter of the prior year, due to an overall weaker end market environment. Driven by lower volumes in construction, HVAC and Transportation, partially offset by residential reroofing and stronger food and beverage container sales. Within Precoat Metals, excess imported prepainted metal has worked its way through the market. And with tariffs likely to remain in place, we anticipate Precoat Metals will start to benefit from the replacement of prepainting metal imports. The company's third quarter gross profit was $101.9 million, or 23.9% of sales, compared to $97.8 million or 24.2% of sales in the same quarter of the prior year. Selling, General and Administrative expenses totaled $32.5 million in the third quarter, or 7.6% of sales. This compares favorably to last year's third quarter, which was $39.2 million, or 9.7% of sales, which included costs associated with severance and one-off employee retirement expenses. Operating income for the quarter was $69.5 million, or 16.3% of sales, a 180 basis point improvement compared with $58.5 million, or 14.5% of sales, in the prior year third quarter, due to operational improvements this year and nonrecurring items included in last year's third quarter results. For the third quarter, we reported a net loss in equity and earnings of $1.4 million. This was after recording $0.6 million post-closing loss adjustment on the previously announced divestiture of the Electrical Products business. Losses in the quarter from our AVAIL joint venture are primarily due to the excess overhead costs resulting from this divestiture. Compared to the third quarter of last year, equity in earnings were $8.6 million lower. With the sale of WSI in December 31, 2025, and progress in resizing AVAIL's overhead costs, we are forecasting equity and earnings from unconsolidated subsidiaries to be 0 for the fourth quarter of this year. Interest expense for the third quarter was $12.2 million, representing a $7 million improvement from the prior year. Driven by a combination of actions, including debt paydown, debt repricing and the introduction of the receivable securitization facility. The current quarter income tax expense was $14.5 million, reflecting an effective tax rate of 26.1%, compared to 26.5% tax rate in the prior year's third quarter. We do not expect the One Big Beautiful Bill Act to have any material impact on our income tax expense or effective tax rate for the year. However, it will reduce our cash taxes paid in 2026. Reported net income for the third quarter was $41.1 million, compared to $33.6 million for the third quarter of the prior year. AZZ reported adjusted net income of $46 million, which excludes the amortization of intangible assets of $5.8 million and the AVAIL equity loss adjustment of $0.6 million, our adjusted diluted EPS of $1.52. This compares favorably to the prior year's adjusted net income of $41.9 million and adjusted diluted EPS of $1.39, an increase of 9.4% compared to the third quarter of the prior year. Third quarter adjusted EBITDA was $91.2 million, or 21.4% of sales, compared to $90.7 million, or 22.5% of sales, for the same period last year. Turning to our financial position and balance sheet. Our strategy for deploying cash flow includes investing in high-return organic and inorganic initiatives, paying down debt, returning capital to our shareholders through our quarterly cash dividend and buying back our stock. During the third quarter, we generated cash flow from operations of $79.7 million. Capital expenditures for the quarter were $18.5 million, which included a combination of sustaining and growth capital. Stock repurchases for the third quarter were $20 million, at an average price of $99.28 per share, while cash taxes were higher in the quarter associated with the previously mentioned AVAIL joint venture gain offset somewhat by the impact of the One Big Beautiful Bill Act. We ended the quarter with a net debt position of $534.7 million and $337.1 million in available borrowing capacity, consisting of $336.4 million in the company's revolving credit facility, and $0.6 million in cash and cash equivalents. After paying down $35 million of debt in the quarter, our credit agreement net leverage ratio was 1.6x, which is within our previously announced target range of 1.5 to 2.5x. And finally, as Tom mentioned, over the same period last year, we increased and paid our quarterly cash dividend of $0.20 per share, up from $0.17 per share. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Good morning, everyone. The U.S. infrastructure investment cycle, along with an intense wave of investments in generative AI and machine learning technologies, is in the early stages of driving demand for high-power density and advanced cooling systems. These hyperscale data centers require coatings that extend well beyond just structural steel and transmission poles. For example, these projects require specialized coatings for critical applications, including corrosion protection, aesthetics, functionality, fire safety and regulatory compliance. Massive data center investments are typically paired by necessity with co-located power generation and grid upgrades, which are multiyear construction projects. We expect these private and public colocation investments will reinforce a positive long-term secular trend benefiting both AZZ Metal Coatings and AZZ Precoat Metals. We also expect solar projects to remain strong as many of our solar customers have backlogs that extend well past the expiration of the current tax credits. These projects are focused on large-scale sites, including data centers being developed commercially that provide power for continuous high load requirements. Excluding data centers, nonresidential construction remains subdued in the quarter primarily driven by interest rate and lingering tariff-related uncertainty while residential construction was also soft. Despite this, we saw positive trends in the metal residential reroofing market as it continues to gradually take share from the asphalt roofing market. This helped offset a slower-than-normal storm season as no named hurricanes made landfall in the Continental United States in the current year. Looking ahead, most forecasts point to flat to regionally selective modest growth in construction through calendar year 2026. Finally, as we progress through our fourth quarter, it's worth noting that last year's fourth quarter was impacted by unusually wet and cold weather. Prolonged temperatures below 40 degrees, and gas curtailment actions by utility providers, led to a record number of lost production days in the prior year quarter, particularly in Texas. Therefore, we anticipate our fourth quarter may present somewhat easier year-over-year comparisons to last year's December through February period. With that, I will turn the call back over to Tom. Thomas Ferguson: Thank you, Dave. Turning to our fiscal 2026 guidance update. We have narrowed the forecast ranges for total sales, EBITDA and adjusted EPS. We anticipate that our sales will be in the range of $1.625 billion to $1.7 billion. Adjusted EBITDA will be in the range of $360 million to $380 million. And adjusted diluted earnings per share will be in the range of $5.90 to $6.20. And as Dave mentioned, we believe that last year's fourth quarter weather-related impacts will be less severe. Our strong financial and market positions enable us to capitalize on strategic growth opportunities while executing on our broader capital allocation plans. We expect to release fiscal 2027 guidance in the next few weeks for our new year starting March 1. Consolidation in the industry continues to present compelling opportunities, and we are currently evaluating several strategic tuck-in acquisitions that align with our playbook and expand our market reach in Metal Coatings and Precoat Metals. We continue to take a disciplined approach to M&A, targeting opportunities to drive sustainable growth and generate meaningful value for shareholders. Finally, I want to sincerely thank our AZZ team for their unwavering dedication, disciplined focus and the pride and passion they bring every day to deliver exceptional quality, service and value creation to our customers and other stakeholders. Now operator, we would like to open the call for questions. Operator: [Operator Instructions] The first question comes from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess, first off, on the Metal Coatings segment and also Precoat. Can you just give us a sense as to how your order backlogs have shaped up in context of some of the complications of the operating backdrop with the government shutdown and so on and so forth? And just specific to the government shutdown, did it have any material impact on you in either of the two segments? Thomas Ferguson: I think as we've discussed typically on the Metal Coatings side, we really don't have much backlog. We've got -- but we do have a good forward look from our sales organization in terms of what our customers are -- what their outlooks are. So we feel really good at this point as we look at finishing the year. That's why unless weather gets really, really ugly as it did last year, we think Metal Coatings has the momentum and opportunities to have a really good finish to the year. So feeling really good about that, and it's both as we've mentioned, the big projects, lot of opportunities, whether it's data centers, whether it's solar plants, transmission distribution, a lot of the pulp business and towers. It's just all really active, particularly in a lot of the areas that we've got good capacity. On the Precoat side, much more of a mixed bag. I think -- didn't feel anything from the government shutdown to speak of on either side just to get that out there. But on Precoat, yes, they're more challenged with residential, commercial construction. They are getting -- benefiting from some of the data centers, a lot of painted metals on those. But -- and then in terms of roofing, it's more than conversions as houses are putting new roofs on. They're more and more of them are moved into metal, which is good for us, but it's not enough to offset the market -- call it the market headwinds. So -- and they don't really have backlog either, but they do have a lot of bare metal, and the bare metal is lower than at this time last year. So they're chasing stuff that's going to be quicker turn to maintain their sales levels. Ghansham Panjabi: Got it. And then specific to Precoat, Tom. I mean, obviously, a lot of distortions in order patterns last year with tariffs and the adjustments in imports and so on and so forth. Is the underlying operating environment worsening as we head into fiscal year -- into calendar year '26? Or is it just at a low point and there's no recovery on a consolidated basis given the ups and downs you -- across the business as you called out? Thomas Ferguson: No. I think you got a couple of things going on, some of which is in our control, some of which isn't. But I think we believe the markets have pretty much bottomed and stabilizing. And so we're seeing opportunities. And of course, we're going after more. We're winning some market share that's out there to offset the market softness. But -- and then we've got the Washington plant ramping up, and that is one of the areas where we are seeing opportunities in the container. And as we continue to talk about plastics converting to aluminum, that's just -- we probably couldn't have opened up new capacity for the container business at any better time. So we get pretty excited looking at next year and having a full year of run rate production at the new Washington site. Not to mention we've made some investments and are going to continue making investments at the St. Louis container site. So that's where we are excited, and we're chasing all of that we can find and have a good partner on Wash, MO and then other opportunities with other customers there. So that's where our focus is and then doing everything we can to convince customers to go with us instead of the competition. Ghansham Panjabi: Okay. Just one final one on -- I know you'll give fiscal year '27 guidance formally in a few weeks. But any sneak preview you can share with us as it relates to the variances that we should keep in mind as we finalize our estimates for next year? Thomas Ferguson: No, I think -- I think as I alluded to, Metal Coatings, we look at them finishing strong for the balance of this fiscal year. And even though they don't have backlog, they're stacking up some pretty good opportunities as we kick off going into next year. So we're feeling real good about that. Obviously, we've got a budget to get approved by our Board. So we'll do that in about 3 -- well, 2 weeks at this point, and then communicate as soon as we can put something together and get new guidance out. But yes, feeling really good. I like where we're positioned. I like what our teams are doing. I like the leadership teams we've got in place. And I like what they're focusing on. So I'm pretty enthusiastic. Operator: The next question comes from Nick Giles with B. Riley Securities. Nick Giles: Congrats on the strong results. It's especially nice to see both the buybacks and the debt reduction, but I wanted to go back to M&A. And I was just curious if you could give us some additional color around what kind of opportunities you're seeing out there today? Is it Metal Coatings versus Precoat? Single site or multisite? Thomas Ferguson: Yes, that's a great question. I think the M&A pipeline is very active. It's predominantly bolt-ons onesie-twosies, which is kind of -- I'd like to say it's in our sweet spot. We acquired Canton and just ramped it right up. It's our typical integration playbook, and bring it right up to our fleet margin levels and go grow it. So those are the kind of things we've got in the pipeline. I don't see us getting anything closed by the end of this fiscal year. It's just too many things going on and not that we're not focused on it and got some good -- the teams are active. But I'll be really shocked if I'm sitting here on this call at this time next year without a couple of wins on the board in talking about those onesie-twosie bolt-ons, which just -- we'd like to get a couple of them in the camp, or in the family so to speak. Nick Giles: Got it. Well, Tom, that's good to hear. Maybe switching gears. You talked about plastics to aluminum and Washington was extremely well-timed on that front. But aluminum prices have reached all-time highs in the U.S. And I know you don't directly feel the impact of that. You have the tolling model. But your customers might feel that impact. So I was curious if you've seen any changes in demand on that basis? Or if you feel the Precoat business has a sensitivity to aluminum prices? David Nark: Yes. Thanks, Nick. This is Dave. I'll take that one. We don't think that there's going to be much sensitivity to the aluminum just because when you look at the container market, in particular, there has been the secular shift to aluminum driven largely by people's more reluctance to drink things out of plastics, in particular, and the concern around microplastics. When you look at in the quarter, in particular, I think it's underpinned by the results of the segment. Our Consumer segment in particular, was up 11%. And when you take a look at the disaggregated sales. So we feel really good about what we're seeing. Wash, MO is ramping nicely, as Tom mentioned. We've got a great partner there and a lot of long-term prospects that continue to come our way. Operator: The next question comes from Eric Boyes with Evercore. Eric Boyes: Maybe first, how impactful to Precoat segment margins might the Washington, Missouri ramp, the 75% exit rate in fiscal 4Q be? And when might we hear about remaining capacity allocation there? Jason Crawford: Yes. Eric, it's Jason here. I can take that one up. Certainly, as we've previously communicated the margins that we expect from the Washington facility just based on the math of the equation of that product that we're selling are going to be complementary. So it is going to add a lot but tailwind to the margins that we see at Precoat. In terms of the additional capacity, we're solely focused on our partner at the moment, and ramping up capacity for that partner is coming through the cycle. And we're very pleased with where we're at, but we still got a lot of work to do and certainly a lot of work to achieve here in Q4. So it's really going to be into the early part to the mid part of next year before we really start to focus on bringing additional customers to that facility. Eric Boyes: Okay. Appreciate that. And then maybe second, and Dave, I think you alluded to it in the prepared remarks, but can you help us with how we should think about kind of quantifying the benefit of the favorable weather comp in fiscal 4Q? David Nark: Yes. As we mentioned, on a high level, when you look at last year, it was unseasonably cold and wet. We had mentioned last year, I think that we lost around 200 days of production collectively in the quarter. So I don't have the specifics in front of me right now, but we do believe that we're seeing better weather so far in the fourth quarter. Today, in Texas, it's going to be 80 degrees. So a far cry better than it was last year at this time. But we can follow up maybe after the call, and I can see if I can get you more detail. Operator: The next question comes from Adam Thalhimer with Thompson, Davis. Adam Thalhimer: Congrats on the record sales quarter. Can you update us on pricing in the Metal Coatings segment? I'm curious also how price might be impacting margins in that segment? Thomas Ferguson: Yes. We talked a lot about -- we try not to talk directly about pricing, since we do have some competitors on these calls. But when we're chasing large projects and when we talk about transmission, distribution, and solar, and data centers, they tend to be bigger projects, and so it just attracts more competition. So it will -- that's when we're talking about the mix because you're going to have -- not significantly, but you're going to have marginally lower margins on those big projects. And so they formed a bigger piece of our business. And we had opened up to that because we had decided that we were pushing the top end of our margins. And so we've kind of opened up the opportunities. Let's chase some -- hate to call it chasing the volume. But let's be more open to taking some of that -- those opportunities. And I think it's been good for us because we've got capacity. That's going to help us the balance of this quarter. It definitely helped us in the third quarter. But we're not getting out of control. It's -- we got a tightly controlled process on how we price projects. A couple of things others that hasn't been talked about, but we do have zinc continuing to go up in our kettles. We tend to push price as those costs go up. And we price it 41 plants on every given day. So I think the teams have demonstrated great discipline and yet going after opportunities with customers to build sustainable momentum. And -- so we're pretty excited at this point about what that team is doing. Adam Thalhimer: And -- either Tom or David could address this. But I am curious, you guys aren't the only ones talking about the data center is getting bigger in 2026 versus 2025. Just curious if you could flesh that out a little bit for us, and why you're focused more on it today? David Nark: Yes. I think as you look at the data centers and in my remarks, I was talking about, we're really excited about the number of opportunities within a data center that we touch. So it goes just beyond structural steel that's used for building foundations, and the structure envelope of the building, and then the related power coming into it. We do believe that Precoat will see some opportunities as those projects move further along. We've got customers on the Precoat side that make insulated wall panels for instance. And then there's a lot of coat specific work that's driving the need for increased metal and coated metal, whether it's galvanized or prepainted. So that's why we're bullish on the segment. It's a big segment. It's a growing segment and our share within it is expanding as well. Adam Thalhimer: Good. And last one for me. David, you brought up the metal roofing opportunity. Do you have any idea today what the share of metal roofing is for new construction and repair and remodel versus asphalt? David Nark: Yes, we do have some data on that. When you look at sort of the breakout in residential between new construction and replacement, it's just shy of 5% of the new construction market, is now embracing metal roofing. It's gone up about a point -- a full point since 5 years ago. And so we think that trend is going to continue. And then on the replacement side, it's a larger impact there. It's about 14% of the replacement market today. And growing at a faster rate, driven by a few things. One of them is building coats. It is more resistant to storm damage over time than asphalt shingle and also HOAs, which have historically been a little reluctant to embrace different types of roofing material other than asphalt are now loosening up their standards and embracing that as well. So we're very excited about it. Operator: The next question comes from Daniel Rizzo with Jefferies. Daniel Rizzo: Just to follow up on that last comment. Is there a particular region in a country where metal reroofing is more prevalent? You mentioned HOAs, I don't know when I think HOAs, I think of where my parents live, which is a kind of retirement places in Florida and Arizona. Is there any regional mix that's relevant? David Nark: Absolutely, Daniel. Yes, we're seeing a stronger concentration of that through the south in the areas that you mentioned. So Florida, in particular, as well as here in Texas, and all the way over to Southern California and Arizona are all markets that generally have a higher concentration of metal roof than in the northern climates. Daniel Rizzo: Okay. And I may have asked this before, but -- sorry, go ahead, I'm sorry, did you say something? David Nark: No, I was just going to say yes, they do well where we got more of a corrosive environment, or you've got a lot of sun. So they tend to hold up better. Daniel Rizzo: Okay. Okay. No, that makes sense. And then for the just kind of traditional non-resi construction, and maybe I've asked this before, but what's the lag between when you start to see some easing in credit towards -- a resi starting to rebuild and it kind of translates to demand for you guys. Is it immediate? Or is it like a 6-month lag? Or how should we think about it? David Nark: Yes. When you look at it and again kind of taking a look at just some of our sales data, we have seen -- in my prepared remarks, I talked about subdued construction on the non-resi side, and then the residential being down a little more significantly. So I think that as you move forward through the end of this year and into next year, the fact that there's been some rate movement already should be a positive for the market, and we should start to see the benefit of that sometime here and as we enter into calendar 2026 and our FY 2027. Thomas Ferguson: And I'd add on the residential side, it's more tracking to mortgage rates. But it's going to -- on a lot of these capital projects, it's a 6- to 9-month lag time in general. So -- and then -- but it's looking at the forward curve. So we're hearing more optimism out there, I guess, I'd leave it at that. Operator: The next question comes from Mark Reichman with NOBLE Capital Markets. Mark La Reichman: Just focusing on the Metal Coatings business for a minute. So the second quarter, the sales growth was 10.8% relative to the prior year quarter, and 15.7% third quarter year-over-year. And we did see the gross margin go down a little bit, 30% in the second quarter versus -- what was it, 30.9% and 29.8% versus 30.9%. You mentioned chasing these bigger projects, but could you maybe get a little more specific? Are there specific large contracts that kind of drove the big sales increase, and might you expect in 2027, maybe a little more moderation in the sales growth, but maybe a tick up in the margin? Or do you think these big projects are just going to continue? Thomas Ferguson: No, I think there's a couple of things here. So if you take typical transmission distribution, big poles, towers, it's -- it depends on where it hits -- which plants the project activities act. Some of our plants are built for big poles when projects come in different sections of the -- so this is a very temporary kind of thing. And we've invested a lot in our capabilities and capacities. So yes, as we get into next year, I expect that you'll see those margins hopefully improve as we've got some operational improvement activities. We've invested in kettle capacity. We've invested in specific things that will help us run some of these kinds of projects, or the bigger projects better. And then we've added more trucking so that we can move things in between our customers and our plants. And pivot things to the plants that are going to be more capable of running certain projects. So a lot of things that we've been doing this year to -- which is one of the reasons we did open it up, and we want to want to continue with that momentum going into next year. So yes, I would not expect to see double-digit growth quarter-over-quarter going in as we get into next year. I expect growth, and also expect us to be able to handle it with the margin profile, that kind of where we're at plus. Mark La Reichman: Then so you've done a great job reducing debt and repurchasing shares. Just on the dividend policy, have you kind of announced at a precedent with the increase in the first quarter dividend? I mean, is that kind of what investors kind of expect is maybe one increase per year? Jason Crawford: It's certainly, obviously, with the realignment of our debt in the AVAIL transaction in the summer. It gives us the luxury to readdress that and whether it be an annual basis or such like. It's certainly something that's on our radar. It's certainly something that we continue to consider and continue to take a look at. So given that profile, then it's certainly something that we will look at come up for this next cycle. Thomas Ferguson: Yes. And we are committed to being more regimented about looking at it consistently each year and -- and as we -- this is the time where we are putting the budget together, the plans together and talking about these things with our Board. So the timing is good, as Jason said, but we're committed to evaluating this annually and not having to go several years like it did this last time before we have an increase. Operator: The next question comes from Gerry Sweeney with ROTH Capital. Gerard Sweeney: Most of my questions have been answered, but I just had one quick question on Precoat. You implied that you think the segment has bottomed, but we also talked about some prepayment imports that are being at surplus. Are you able to bracket out how much that surplus was a headwind for the segment, and what we should be thinking about that on a go-forward basis? Thomas Ferguson: Yes, certainly. The thought process around about the prepainted metal imports is really correlating the data that we can see internally. So we can see internally the [ beer ] imports coming in and get a feeling for that and then translate it back into what prepainted import material is out there in the pipeline. So we've seen that filter through our system and filter through our customer systems to the point where less prepainted metal imports historically, up to this point in time, have not necessarily had any impact on our business. And our anticipation going forward is we start to see some of that benefit filter through. If you think about that prepainted metal import market, it's around about 10% of the U.S. market is fulfilled through that supply chain. It's down around about 35% this year, but it's gaining momentum in terms of how much it's down, obviously, it's down more as you get to the third quarter versus the first quarter. So it creates that market opportunity. And really, if you look at that prepainted metal import market, and who can serve that market, then there's only a couple of players that can really serve that market. And obviously, AZZ Precoat is one of the names at the top of that list. So it creates a nice opportunity for us as we start to look at our opportunities for next year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson, CEO, for any closing remarks. Thomas Ferguson: Thank you, operator. And thank you for joining us this morning. As you can tell, we're pleased with our results for the Q3. Feeling good about the full year. And then it's early, but getting excited about fiscal 2027, looking forward to announce some guidance for fiscal 2027, and then announcing our results in a few months. So happy new year. Thank you for joining us. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host, Whitney Notaro, Head of Investor Relations. Whitney Notaro: Good afternoon, everyone. Welcome to Gap Inc.'s Third Quarter Fiscal 2025 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, and August 29, 2025, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, November 20, 2025, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. Apparel consumer service for the 12 months ending October 2025, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard. Richard Dickson: Thanks, Whitney, and good afternoon, everyone. We are very pleased to report third quarter results for Gap Inc. that exceeded our expectations across multiple measures, including net sales, gross margin and operating margin. We've done this by executing our strategic priorities with precision and consistency. The reinvigoration of our iconic brands continues to gain strength. Our playbook rooted in purpose, powered by creativity and executed with excellence is working. And it's bringing consistency to how we operate and clarity to how we win. The momentum in the business is clear from product design to storytelling, from store execution to digital engagement. The result is a company that's becoming more agile and performing with increasing confidence. On today's call, as usual, I'll provide an update on our third quarter performance and progress in the context of our 4 strategic priorities. Then Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions. Let's start with financial and operational rigor. Gap Inc. comparable sales were up 5% versus last year, the highest quarterly comp in over 4 years. We were pleased to see our 3 largest brands, Old Navy, Gap and Banana Republic, posting strong positive comps in the third quarter, demonstrating the resilience of our portfolio despite a challenging quarter for Athleta. We delivered operating margin of 8.5%, which benefited from growth in AUR as customers responded well to our brand offerings. We continue to strengthen our balance sheet, ending the quarter with strong cash balances of approximately $2.5 billion. Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. This playbook when applied with relentless repetition creates a powerful flywheel, which has resulted in 7 consecutive quarters of comp growth for our portfolio. Our largest brand, Old Navy, had an incredibly strong quarter, reflecting the brand's strength, consistency and continued momentum. Comparable sales were up 6% with the brand consistently gaining market share over the last 2 years. Customers responded to the compelling value proposition, resulting in healthy growth in average unit retail and notably across all income cohorts, which is encouraging despite widely reported macroeconomic pressure on the low-income consumer. Old Navy's consistent performance is being delivered by trend-right products, our strategic pursuit of category leadership and compelling storytelling. The quarter began with a robust back-to-school season, reinforcing its leadership position in kids and baby in the U.S. denim posted its highest third quarter volume in years with growth across the family. Women's and girls' showed particular strength driven by trend-right styles like barrel, wide leg and baggie fits. Active delivered impressive double-digit growth in the quarter with strength across the family. This demonstrates the strong customer response to the brand's distinctive value proposition in the active market and innovation, including new franchises like Bounce fleece. Today, Old Navy is the #5 active apparel brand in the U.S. and the #4 brand in the women's active space. As we begin to drive more growth through strategic partnerships that amplify our brand relevance, our latest Disney collaboration kicked off the holiday season with our Jingle Jammies collection, which is exceeding our expectations, driving excitement across the family and fueling strong performance in the broader sleep category. Another great example is our first designer collaboration with American Design Legend, Anna Sui. The collection brought high-fashion design to a broader audience, staying true to Old Navy's democratic and accessible brand promise. The campaign featured rising Gen Z artist, PinkPantheress and resonated across platforms. In September, we announced plans for a strategic expansion into the beauty category with a phased launch starting with Old Navy. As one of the fastest-growing, most resilient retail categories in the U.S. and customer insights that reinforce strong interest in the category, we see a clear and meaningful opportunity to grow in beauty. We recently expanded Old Navy's Beauty collection in 150 stores with select stores offering dedicated shop-in-shops and Beauty Associates. We intend to use this pilot to inform a thoughtful scaling strategy that will take us from seeding in 2026 to accelerating growth in the years that follow. Old Navy's third quarter performance reflects the strength of the team's work, which is clearly resonating. This brand continues to delight consumers and consistently deliver positive comps while reinforcing Old Navy's position as a brand that defines value, style and accessibility in American fashion. This gives us confidence as we move into Q4 and beyond. Now let's turn to Gap. Gap delivered another standout quarter, reinforcing the reliability of its execution and the compounded strength of our namesake brand. Comparable sales were up 7% on top of 3% comp last year, marking the eighth consecutive quarter of positive comps with growth in average unit retail, consideration, organic impressions and new customers, a clear signal that Gap's momentum is real, repeatable and resonating. The quarter was fueled by broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim, featuring global group, Katseye. This campaign demonstrated the power of the playbook in action, featuring trend-right product, amplified by culturally relevant storytelling. With more than 8 billion impressions and 500 million views, Better in Denim culminated in a global cultural takeover and has become one of the brand's most successful campaigns to date, generating significant traffic and double-digit growth in denim. The results speak for themselves. Gap continues to accelerate, attracting a younger, highly engaged consumer, particularly Gen Z, who is discovering us while reinforcing loyalty with our core consumer. As Gap brand equity and relevance continues to build, the iconic Gap Arch logo hoodie is a great example of the brand reclaiming its place in the cultural conversation. During the quarter, we marked the 30th anniversary of the Gap hoodie with our first-ever Hoodie Day. It was a moment that energized our teams, drove connection with consumers and contributed to the notable strength in Fleece during the quarter. Our recent collaboration with Sandy Liang was another highlight, delivering strong results and continuing to position Gap as a platform for creative partnerships that drive relevance and new customer acquisition. For holiday, the brand is leaning into CashSoft, where you'll see continued innovation with extensions into new silhouettes, on-trend sets and vibrant colorways. Earlier this month, we launched our highly anticipated Give Your Gift Holiday campaign, a continuation of our effort to bridge the gap across generations through music, creativity and culture, featuring emerging artist, Sienna Spiro. Gap's execution of the playbook has been fantastic, and it's been exciting to see the brand building on their success quarter after quarter while continuing to drive distinction and relevance. It's a brand that knows who it is, where it's going and how to win, and we're looking forward to carrying that momentum into the holiday season. At Banana Republic, we continue to make steady progress. The work to strengthen its positioning, leaning into its heritage is paying off. Comparable sales were up 4% in the quarter, reflecting meaningful traction as the brand's reinvigoration takes hold. Growth was driven by continued progress in the harmonization between men's and women's. Men's elevated fashion designs featuring distinctive textures and fabrications continue to perform well. And we've seen notable improvement in women's as fit and product refinement are resonating, particularly in dresses and wovens. Building on the success of the brand's prior campaigns, the response to Banana Republic's fall campaign with David Corenswet was strong, breaking brand engagement records and fueling growth while expanding cultural reach and resonance. For the holiday season, Banana Republic is leaning into its distinctive position as the modern explorer brand. Our new campaign shot in the stunning landscape of Ireland, captures this essence well with our beautiful product featured in our travel-oriented storytelling brought to life through dynamic destination-rich content. This approach is driving stronger brand affinity and proving to be highly impactful with our customers. Overall, Banana Republic's third quarter results reflect meaningful progress and continued momentum. I'm optimistic the brand is well positioned as we head into the holiday season. Shifting to Athleta. Maggie Gauger, Brand President, has begun to make an impact in her first 90 days. She's taking quick and thoughtful action to begin to reorient the brand. This includes reorganizing the talent structure to align with her vision. The team is doing the right work, acting with speed and urgency to drive progress, but this reset will take time. Our focus is on positioning Athleta for long-term success and returning it to its rightful place as a premium aspirational brand. The brand is at the beginning of its reinvigoration journey. We aren't chasing quick fixes. We are taking a deliberate approach to position the brand for the long term. We're confident that the consistent application of our brand reinvigoration playbook anchored in purpose and heritage will guide Athleta forward. This is about returning to what made the brand great to begin with while reestablishing our clear and distinctive position in the active market. We're encouraged by the steps Maggie and the team have already taken, and we look forward to the continued impact of their leadership as Athleta's reinvigoration takes shape. As we head into the holiday season, our supply chain continues to power strategic advantages. The scale of our global network across sourcing, logistics and fulfillment gives us the flexibility and resilience to operate with confidence. Our long-standing vendor partnerships and diversified sourcing footprint are enabling us to move with speed and deliver newness at the pace of demand. We've introduced new automation and AI capabilities across our omni fulfillment network from robotic unloaders to advanced storage and retrieval systems, which have increased productivity by nearly 30% compared to just a few years ago. This enables us to meet peak demand with greater speed, agility and precision. With a fleet of about 2,500 stores globally and the largest specialty apparel e-commerce business in the U.S., we're positioned to serve our customers wherever and however they choose to shop this holiday season. Across Gap Inc., our teams are inspired and energized by the work we're doing, and you can feel it. The work we're doing together to drive the business continues to ignite real energy inside the company, creating a culture that's united, motivated and focused on execution. This is the culture that is carrying us into the holiday season, where our collective focus is clear: win with the consumer, deliver with excellence and keep building on the progress we've made together. In the fourth quarter, we remain focused on executing with excellence. Our Q3 and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to update our full year outlook, increasing net sales growth to the high end of our prior range and raising our operating margin. We look forward to finishing the year strong and creating a clear runway to the next phase of our transformation as we move into 2026, building momentum. I'll now turn the call to Katrina for a closer look at our financials. Katrina O'Connell: Thank you, Richard, and thanks, everyone, for joining us this afternoon. We delivered exceptional third quarter results, surpassing our expectations across multiple key metrics. Our strategy is working, growing brand relevance combined with operational and financial discipline drove our highest quarterly comparable sales performance in over 4 years, up 5%. We saw strong performance across the back-to-school and early holiday periods, underscoring the increasing resonance of our brands with consumers. With the playbook now in its second year, we're beginning to see a flywheel of growth take hold at Old Navy and Gap, with Banana Republic gaining traction. We exceeded our gross margin expectations with strong flow-through to our operating margin in the quarter, driven by rigor in the fundamentals. Average unit retail or AUR grew again this quarter, reflecting our compelling product offering and the disciplined execution across our teams. Our brand momentum, combined with our strategic supply chain actions, enabled a significant portion of the tariff impact on our margins to be mitigated. With the strength of our third quarter results and our quarter-to-date performance in mind, we are raising our full year 2025 gross margin and operating margin outlook with full year 2025 net sales growth now expected to be at the high end of our prior guidance range. I'll take you through the details of our outlook shortly. We are entering the final stages of fixing the fundamentals. Consistent progress on our strategic priorities has strengthened our position as we move into 2026, where we will focus on building momentum and creating new growth opportunities. Now turning to third quarter results. Net sales of $3.9 billion were up 3% year-over-year, exceeding our expectations with comparable sales up 5%. By brand, starting with Old Navy, net sales were $2.3 billion, up 5% versus last year, with comparable sales up 6%. It's exciting to see the brand winning in strategic categories like denim, active and kids and baby, supported by strong execution of culturally relevant marketing and partnerships. Turning to Gap brand. Net sales of $951 million were up 6% versus last year and comparable sales were up 7%. Relentless consistent execution of the reinvigoration playbook is fueling sustained momentum for the brand, clearly reflected in the Better in Denim campaign. Banana Republic net sales of $464 million were down 1% year-over-year with comparable sales up 4%. Our foundational work on the brand from elevated product to culturally relevant storytelling is resonating with consumers and drove the second consecutive quarter of solid performance. Athleta net sales of $257 million, decreased 11% versus last year and comparable sales were down 11%. We're focused on applying the playbook with rigor, beginning with the fundamentals as we work to reset the brand for the long term. And while we're eager for results, we are executing a phased plan that will take time. Let's continue to the balance of the P&L. Gross margin of 42.4% declined 30 basis points from last year, but exceeded our expectations. As anticipated, tariffs pressured overall margin levels. However, lower discounting resulted in increased AUR growth driven by the consumers' response to our relevant product and storytelling. Compared to last year, merchandise margins were down 70 basis points due to the estimated 190 basis point impact of tariffs. This implies roughly 120 basis points of underlying margin expansion. ROD leveraged 40 basis points in the quarter. SG&A increased to $1.3 billion, primarily due to the quarterly timing of incentive compensation and continued strategic investments. SG&A as a percentage of net sales was 33.9%, de-leveraging 50 basis points versus last year. Third quarter operating margin of 8.5% was down 80 basis points compared to last year, which includes an estimated 190 basis points of tariff impact. This implies roughly 110 basis points of underlying margin expansion. Earnings per share in the quarter were $0.62, a decrease of 14% versus last year's earnings per share of $0.72, primarily due to the impact of tariffs. Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 5% year-over-year, primarily attributable to higher costs due to tariffs. Our disciplined inventory management resulted in slightly negative unit inventories, and we believe we ended the quarter with the right inventory composition. We continue to be rigorous in our approach to inventory for the balance of the year. As we shared on our second quarter call, we've tightened the way we purchase unit inventory to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We expect to operate in line with our inventory principle of unit purchases positioned below sales. The last 2 years have been about fixing the fundamentals, which includes strengthening the balance sheet. We ended Q3 with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 13% from last year. Net cash from operating activities was $607 million year-to-date, and our free cash flow of $280 million year-to-date demonstrates the rigor we have put into managing the business. Capital expenditures were $327 million year-to-date. With regard to returning cash to shareholders, in the third quarter, we paid $62 million to shareholders in the form of dividends, and the Board recently approved a fourth quarter dividend of $0.165 per share. Year-to-date, we have repurchased 7 million shares for approximately $152 million, achieving our goal of offsetting dilution. And while we've achieved our goal, as always, we remain opportunistic. Now turning to our outlook for fiscal 2025. I am pleased with the strength of our Q3 results and solid quarter-to-date performance, which are giving us the confidence to update our fiscal 2025 outlook. We've been operating against a dynamic backdrop for the last few years, and we're expecting the same for the fourth quarter. Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior and global economic and geopolitical conditions. As a result, we continue to take a balanced view with our guidance and remain focused on controlling the controllables. Starting with full year 2025 net sales, we are increasing our outlook to the high end of our prior guidance range and now expect net sales growth of 1.7% to 2% year-over-year. Our outlook assumes ongoing strength at Old Navy, Gap and Banana Republic and a longer recovery at Athleta. Moving to gross margin. With our strong Q3 performance, we are raising our full year gross margin outlook. We now expect deleverage of about 50 basis points year-over-year, driven by an unchanged estimated annual net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply underlying gross margin expansion of approximately 50 to 60 basis points versus last year. Turning to SG&A. We continue to expect SG&A to leverage slightly for the full year. As discussed on last quarter's call, we are driving continuous improvement in the cost structure of the company this year as we rigorously drive $150 million in cost savings in our core operations through efficiency and effectiveness. We remain committed to reinvesting a portion of the $150 million into future growth projects, including beauty and accessories as we pursue the long-term success of the company. A portion of these savings will also offset continued inflation. Now I'll turn to fiscal 2025 operating margin. We now expect an operating margin of about 7.2% for the full year, an increase from our prior guidance range of 6.7% to 7%. This continues to include the estimated net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply meaningful underlying operating margin expansion of 80 to 90 basis points versus last year. Our income tax rate outlook for the year has increased to approximately 28% and primarily reflects the impact of changes in the amount and mix of our geographic earnings. This increase of 1 point versus our prior outlook of 27% represents an approximate $0.03 headwind to EPS. Looking to 2026, as we shared on our second quarter call, we do not expect the annualization of tariffs in 2026 to cause further operating income declines. And we now expect the majority of the mitigation to come from adjustments to our sourcing, manufacturing and assortments with the balance driven by targeted pricing. We continue to be mindful of price elasticity and remain focused on maintaining the overall value proposition for our customers. And while pricing is a lever to manage AUR, it's one of many we've been using to manage margin over time. Other levers include assortment mix, full price sell-through, promotions and inventory management. Our third quarter AUR performance and the momentum of our brands gives me confidence that our AUR growth plans are achievable. There will be a timing dynamic to the tariff impact on gross margin in 2026. We estimate a Q1 net tariff impact similar to Q4, followed by meaningful benefits from our mitigation efforts in Q2. The back half of 2026 should turn to a tailwind as our actions build, and we lap most of this year's tariff impact. In closing, our Q3 results reflect strong execution of our reinvigoration playbook, driving consistency and growth across our largest brands. Continued cost discipline is enabling reinvestment in strategic growth opportunities, while our scale and supply chain strength support ongoing tariff mitigation. When we perform with excellence, it builds confidence. Confidence fuels execution. Execution drives growth. This flywheel is the engine of our momentum. As we look to deliver this holiday season, we remain focused on operational excellence and advancing our ambition to become a high-performing company that delivers sustainable, profitable growth and long-term value for our shareholders. I'd like to thank the team for their commitment to excellence and delivering results in support of our transformation journey. With that, we'll open up the line for questions. Operator? Operator: [Operator Instructions] And our first question comes from the line of Alex Straton with Morgan Stanley. Alexandra Straton: Great. Congrats on a nice quarter. Maybe for Richard or Katrina, can you just dig in a little bit more on what drove such a strong comp acceleration at the Gap banner? And also how you think about sustainable comp level for that business over time? And then maybe for Katrina, just what surprised the upside versus your initial expectations on gross margin? Curious if tariffs played a role and how you think about steady state on that line item from here? Richard Dickson: Alex, thank you. First off, I think it's clear our strategy is working, and it is showing up in the momentum that we're seeing in our results. All 3 of our largest brands exceeding expectations, Navy up 6%, Banana Republic up 4% and Gap delivered another standout quarter with a strong comp of 7% and that's on top of 3% last year, and it represents the eighth consecutive quarter of positive comps for us. This consistency is setting new records for the brand, and it's reinforcing our confidence in its long-term growth trajectory, driven by compelling product assortments, partnerships and marketing have really resulted in growth across all income cohorts. We have seen more high-income consumers choosing Gap. And we really do believe that with the strong competitive position that we've taken between premium and value and the fact that we're bridging the generation gap, it's a really exciting time to see Gap continuing to accelerate. We have been attracting a younger, highly engaged consumer, particularly with Gen Z as they discover the brand. And it's reinforcing loyalty with our core consumer. So the performance in the quarter, which, as you know, was fueled by our broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim featuring the global group Katseye, did incredibly well. I mean we generated more than 8 billion impressions. I think we had over 500 million views. It was the denim story everybody wanted to be part of. We increased our ranking in the denim category. Gap is now the #6 adult denim brand in the U.S., up from 8 last year. Collaborations are continuing to drive relevance and revenue with our latest collaboration this quarter with Sandy Liang, which was incredibly successful, again, attracting new younger customers to the brand. And it's exciting to see the brand just continuing to build on their success quarter after quarter, and we're looking forward to carrying that momentum into the holiday season and beyond. Katrina O'Connell: As it relates to -- sorry, I'm going to finish up, Alex, for you on gross margin. So for gross margin in the quarter, we did exceed our expectations in gross margin by over 100 basis points, and that was actually driven by an in-line expectation as it relates to tariffs. So tariffs of 190 basis points were as expected. But the out-performance in the quarter really came from standout performance, particularly at Old Navy and Gap and better-than-expected AURs as consumers really responded to our product and storytelling, which enabled us to have lower discounting in the quarter. Operator: And our next question comes from the line of Bob Drbul with BTIG. Robert Drbul: I was just wondering if you could expand a bit more on AUR trends, how you're managing AUR trends? And I guess just the growth plans that you've spoken about as you look forward maybe Q4, but even into '26. Richard Dickson: Thanks, Bob. We approach pricing as we always have. I mean we consider all the various inputs while maintaining our overall value proposition for consumers. And in Q3, as our brands continue to gain more relevance and the rigor that we put around inventory management, as that becomes more foundational, we are increasing our price elasticity, and we've been driving higher sell-through at full price. We did take select pricing in Q3 in select categories, denim, which saw double-digit growth and the strength of our execution is really resonating with customers, and we saw growth, as I mentioned, across all income cohorts. The sales were driven by both units and AUR. We had overall AUR improving versus last year. We saw particularly strength in Old Navy and Gap with customers that were really responding well to our style, the quality and the value, which we continue to advance. Banana Republic AURs also were strong. This is resulting in less discounting, better regular price sell-through, and it's giving us confidence that we can continue to drive AUR growth as we enter the fourth quarter. Operator: And our next question comes from the line of Matthew Boss with JPMorgan. Matthew Boss: Congrats on a really nice quarter. So Richard, could you speak to drivers of the top line inflection that you saw at Old Navy this quarter? Any change in momentum, early holiday? And relative to the consistency that you've now clearly shown at the Gap concept, I guess, how do you see Old Navy differentiated as it relates to the market share opportunity for that brand? And then, Katrina, just given actions that you've taken to the cost structure, how best to think about annual operating income dollar growth if low single-digit top line was the baseline multiyear moving forward? Richard Dickson: Matthew, thank you for the question, and thrilled to talk about Old Navy. We had an incredibly strong quarter, comps up were 6% with the brand consistently gaining market share over the last 2 years. It is the #1 specialty apparel brand in the U.S. And the performance this quarter really speaks to the brand's strength, consistency and continued momentum. Customers are responding to what Old Navy does best. We give great style at great value. We saw healthy growth across all income cohorts in AUR, it was driven by trend-right product, which, again, was amplified by compelling creative and better storytelling for our brands. We've been winning in the categories that we've been strategically pursuing with intent. And we've shared those along the way. Kids and baby, denim and active have all been driving the momentum. Active in particular, was a standout in the quarter. We delivered double-digit growth. And I believe it's underscoring the power of our value proposition and innovation. Differentiation as it relates to the market share opportunities that we see, we look at partnerships, Disney's partnership with us. We just presented Jingle Jammies, which was an incredible presentation across the family. It exceeded expectations. We just also introduced Anna Sui's collaboration with us, which was particularly meaningful as the first designer collaboration where we're bringing high fashion to a broader audience. All of this, while we're just beginning to expand the brand into Beauty, which, of course, is early days, but we see incredibly high potential opportunity for Old Navy for that category and the broader portfolio over time. So look, I'm thrilled with Old Navy's consistency in the quarter performance. And I actually am particularly excited about our holiday offering at giftable price points, and we are ready to execute with excellence. Katrina O'Connell: And then, Matt, as it relates to your other question, I would say, as you called out, we've done a lot of restructuring over the last few years. And then this year, we previewed that we're saving about $150 million in our cost structure. We are reinvesting a portion of that into future growth opportunities because we want to be able to seed this next phase, which we're saying is building momentum that we hope over time leads to accelerated growth. So balancing the savings with what we think are important investments for the long term. What I would say is this year, the operating margin that we've guided to of about 7.2% is really only modest deleverage compared to last year, and that's while absorbing 100 to 110 basis points of operating -- excuse me, of tariff impact, which does show the way we are managing the business with rigor, both through cost and margin improvements. As we look forward, we've also said that in 2026, we don't expect the annualization of tariffs to cause further operating income declines as we work hard to mitigate those costs. Once tariffs are fully reflected in the base, we do believe the consistency in our core, combined with top line benefit related to the high potential growth opportunities that we're seeding in '26 should provide sales growth that benefits operating income over time. So more to come on what that algorithm turns out to be, but we feel good about the work we've been doing, and we're certainly pleased with our results. Operator: Our next question comes from the line of Brooke Roach with Goldman Sachs. Brooke Roach: Richard, how do you feel about the store fleet today across brands and banners? Are there any investments that need to be made to fuel the momentum from a shopping experience perspective? And what does that mean regarding store fleet transformation, whether that's remodels or changes in store count as you look ahead into 2026? Richard Dickson: Brooke, thanks for that question. Stores are a really important way for customers to experience our brand. I mean they bring our product, storytelling and service to life in a way that digital just can't. With a company operating a fleet of about 2,500 stores, we are always optimizing our retail footprint. We're closing underperforming stores. We're repositioning some locations that are more relevant to our customers, and we evaluate new store openings. As you know, over the last several years, we've closed about 350 stores that were unprofitable. Last year, we closed about 56 stores across our portfolio. We expect to close approximately another 35 in fiscal '25 with the majority of those closures being specific to Banana Republic. I believe we're at a pivotal point right now where the fleet is really well positioned, and we've been testing new formats and experiences. Gap Flatiron in New York has been functioning for about a year with great learnings that we've started to expand across our Gap fleet with denim shops, new refresh shop here in San Francisco and a variety of others that are on plan. Banana Republic, specifically in SoHo and other locations that we've been refreshing with some great results and of course, Old Navy and Athleta up at [ bat. ] We continue to evaluate these tests and their performance and are getting more and more confidence in the revenue and relevance and the strong returns that they've been driving. We've begun to invest rationally and selectively in the areas that we think will drive the return that we're looking for. And we will continue to keep everybody posted as we look to the combination of repositioning our stores, refreshing must-win stores and again, looking to start to open up new stores where it makes sense strategically. Operator: And our next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: Congratulations. Great to see the progress at the right time. Richard, my question for you is sort of a little bit higher level since you've come, there's such a focus on product and marketing, like the combination of the flywheel effect of those. How is the appointment of design and creative, specifically Zac Posen changed the complexion of creative thinking throughout the organization? And then the marketing piece of it, how has that kind of -- how does that complement kind of the product and creating that flywheel? Richard Dickson: Thank you, Adrienne, for the question. First off, let's just mention Zac. He's been an incredible addition to our leadership team. It's been almost 2 years ago now that he's joined and has brought significant impact on many creative aspects, I would say, both inside the company and beyond. Our objective collectively with Zac and by elevating the creative conversation across our brands, highlighting design and product as an incredibly important attribute to all of our brands has been working. I mean we've been culturally creating moments, curated moments where our brands and our products have taken center stage, not only to some extent on the runway, but on Main Street. And we're attracting talent as well to our portfolio that might not have considered a place like Gap Inc. or our brands prior. When we talk about marketing, which I also am pleased to talk about, we know marketing is a much more complex function today than it was in the past. And as you know, we've been working really hard at driving new narratives that put our brands back into the cultural conversation, and it's our job to be everywhere that our consumer is with the right creative messaging. I think it's obvious we're performing while we transform. We're driving digital dialogue messages with social media as the #1 platform for our consumers. Influencer content is among the most common product discovery methods amongst Gen Z and millennials, which we've been performing incredibly well with. We actually recently launched a cross-brand content creator and social media advocacy program last month, which you might have seen. We now also have a presence on TikTok as a shop and many more. And these methodologies are proving really impactful, but they also require higher quality accelerated amounts of creative. And lastly, we can't help but mention again, Katseye is a great example of that. I mean 8 billion impressions, 500 million views. This was a true cultural takeover. And I think it's another proof point in our playbook, and we believe we've got the means and the experiences and the brands to continue to be more effective and be more efficient in our spend as we've proven this methodology is working, and it will continue to propel us into the future. Operator: And our next question comes from the line of Dana Telsey with Telsey Group. Dana Telsey: Congratulations on the nice progress. Katrina, one for you, one for Richard. As you think about the tariff mitigation strategies, which seem to be effective, the pricing adjustments have seemed to become less and less. Is that the right impression? And how you're thinking about pricing going forward? And then, Richard, the acceleration in store sales is impressive. In your view of the consumer overall, how are you thinking about the consumer? Does it differ by brand, lower and higher income customer, whether it's Gen Z, millennial or baby boomer, how do you think the current feeling is in the attitudes towards merchandising? How do you think of consumer demand? Richard Dickson: Dana, thanks for the question. I think I'm going to jump in here and take consumer first, and then Katrina can follow up with tariff mitigation answers. First, I think it's really important to share, we're seeing consistency and strength in our customer behavior. As I mentioned, we're really proud that we're winning with all income cohorts. And you could see it with the strong differentiation within our portfolio. Together, we see equal growth across low, middle and high. And it's evidenced by our 2 largest brands, Old Navy and Gap. Now there is external data that points to, of course, the macro pressure on the low-income consumer, but our customers are finding our price value, our product, our styles. It's breaking through the competitive landscape, and we're winning. We're also doing this Dana, with less discounting. We've got better regular price sell-through, increased AUR, which is really indicating that our product is resonating. I think you could see it when you go into our stores, we're just telling better merchant-driven stories, and it is supported by incredibly relevant marketing. We're also excited to see that the high-income consumer is discovering our fashion, quality and value. And we think that is also being driven by the relevant narrative that we've been creating in the marketplace. So when I step back and I look at our portfolio competitively, I think our portfolio appeals to a wide range of consumers. It gives us greater flexibility in today's environment. When we look at our portfolio today versus even a few years ago, we are a much stronger portfolio of brands today. We're resonating with consumers. And it's our job on a day-to-day basis to create great product with great style and quality, exceptional value. And I think we will prevail in any marketplace if we stay consistent and true to that narrative. Over to you, Katrina, on tariffs. Katrina O'Connell: Sure. So as it relates to tariffs, we did do a slight amount of pricing in the quarter, but we really honestly, Dana, approach pricing as we always do. We look at all the various inputs really with an eye to maintaining the overall value proposition for our consumers. So we did take select pricing in select categories. I think denim is a really good example at Gap, where given the strength, we were able to take slight pricing and see double-digit growth in sales in spite of that. The strength of our execution, as Richard said, really is resonating with our consumers. And as Richard said, we saw sales come from both units and AUR in the quarter. I would say the bigger driver of the outperformance in the quarter and what we're seeing is less discounting and better regular price sell-through. And I think as Richard said earlier, that really gives us the confidence that we can keep driving AUR growth as we enter the holiday season. Operator: And our next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Maikis: Just switching gears to Athleta for a minute. How do you feel about the level and content of the inventory there? And do you have a time line for when you think that sales could begin to stabilize? Richard Dickson: Lorraine, thank you for that question. We're not hiding from Athleta. It's a very important brand in our portfolio. We have been disappointed in the trend. But Maggie, our Brand President, has hit the ground running in her first 90 days, and she's balancing near-term priorities with, of course, the longer-term reinvigoration objectives that we have for the brand. As I mentioned, she's been building her leadership team to align with her vision, and she is truly setting the foundation for the brand's next chapter. A lot of work happening, editing the assortment, studying the consumer, evaluating our retail footprint and, of course, the overall customer experience. This is a reset year for Athleta, and our focus is going to be on positioning the brand for long-term success and returning it to a rightful place as a premium purpose-driven aspirational brand. We do believe Maggie and the team are taking the right steps, and we remain confident that Athleta will emerge as a brand that really does matter even more to women through product, trend and storytelling. We understand there's a lot of work to do, but we believe we've got the right leader in place to do it, and we look forward to continuing to update you as more news unfolds. Katrina O'Connell: And maybe what I'd add, Lorraine, on inventory is as we assessed Athleta in second quarter, given sort of the trend in the business, we did make some choices to lower inventory levels overall. And so we have aligned inventory for Athleta to this lower sales trend as we head in -- for Q3 and as we head into Q4. So we feel good about the levels and quality of inventory at Athleta, and we'll remain pretty prudent as it relates to Athleta until we start to see the product and the marketing get back to where we would expect it to be for this brand. Operator: And our next question comes from the line of Paul Lejuez with Citigroup. Paul Lejuez: Just to go back to the unit comments. Curious which brands you saw the greatest increases in units? And then I'm also curious on the inventory versus unit gap that you mentioned, what will that look like at the end of the year, the finish up fourth quarter and then into the first half of '26? Katrina O'Connell: Paul, I'm going to take the first one, but we had a lot of trouble hearing your second question. So apologies on that one. We're going to ask you to repeat it. As it relates to units, we were really pleased to see that as our brands are gaining relevance, combined with the rigor that we're putting into the business that we're seeing our elasticity improve, and we're getting higher sell-throughs at regular price. When we look at the units in the quarter, I would say units were aligned with where we see outperformance in the business, particularly at Old Navy and Gap, and we also saw AURs there as well. But I'm going to ask you to repeat again the second part because we couldn't hear you. Paul Lejuez: Sure. Sorry, Katrina. So the inventory dollars versus unit gap that you spoke of this quarter, curious what that looks like at the end of 4Q and then in the first half of next year. Katrina O'Connell: Oh, thanks. Sorry about that. So we continue to keep our units below sales as we try to keep within our principles of keeping inventory tight. We want to keep maximum flexibility so that we can respond in season to various demand scenarios. and be responsive to consumer demand. So as we think about end of quarter inventory, I would expect it to be similar to how we just ended Q3. Operator: And our next question comes from the line of Corey Tarlowe with Jefferies. Corey Tarlowe: Richard, I wanted to ask about the power of partnerships. And the reason being is I don't think that there's a retailer in the mall today that has done more partnerships in the time span that you've been at Gap to expand the aperture for the brand and to build, as you say, relevance in revenue. And I was curious about what you think strategically this means for the business ahead. And then the follow-up to this is how have the consumers responded to these improvements in the brand in the way that you've been able to say, remove promos on categories like denim at Gap? Richard Dickson: Okay. Corey, thank you for the question. First off, I think it has been a credit to the brands and teams that have followed the methodology that we shared with our playbook. And as part of the playbook and when we look at cultural relevance, collaborations help a brand drive relevance. It broadens its customer base and continues the drumbeat between its larger partnerships and releases. So it keeps topical in the context of the amount that we do and the timing that we do, do them. Now you have to really be authentic. It's not just a collaboration. It's a well-thought-out strategic partnership. To date, Gap brand, as you mentioned, we've launched over 13 collaborations. It continues to drive enormous excitement and attract new audiences to us. And they're very precise, and they need to be. They need to be win-win. And most importantly, they need to be authentic to the consumer. The collaborations that we've been doing, as I mentioned, are attracting new generations to Gap, but it's also, at the same time, reinforcing the brand to those who love us for years. This is, to some extent, a balance of art and science. The latest collaboration this quarter with Gap brand with Sandy Liang in the third quarter, it drove incredible engagement and overall basket. You asked about consumers responding in relation to it and how it affects our business. I mean more than 25% of the customers who shop these collaborations were new to Gap. And of those who shop the collaborations, 20% shop beyond the collab. So we see the attraction that these collaborations when done right, are generating for the brand. And then we -- by offering and showing other product, we're now establishing broader, bigger house files and more exciting relationships with our consumers. We just launched the Anna Sui collection with Old Navy, which is the first designer collaboration in Old Navy, incredible success, similar engagement, a really well thought out precise partnership, and we believe a sign of things to come. So again, laddering up. It's great credit to the teams across the brands for driving the playbook, executing it with excellence and really creating win-win collaborations for the consumer and our business. Operator: And our final question comes from the line of Michael Binetti with Evercore ISI. Unknown Analyst: It's [ Carson ] on for Michael. Katrina, probably a question for you. I appreciate the color on the wraparound effect of tariffs into 2026. But if we set tariffs aside, you had really nice underlying gross margin expansion in third quarter. The guidance implies pretty similar for fourth quarter. How much of that underlying expansion is from AUR versus other drivers? Because I think I've heard several times today, confidence in the AUR plan. So if that's a leading driver, is it safe to carry those impacts over into the next few quarters? Katrina O'Connell: Thanks for the question. So the way I would answer that is our margin strength in Q3 came from a combination of favorability in commodities, aided by some supply chain leverage that we got as well as strength in AUR. As we look to Q4, what you'll see is that the tariff impact to Q4 is similar to what we just experienced in Q3. And we're also still seeing the commodity benefits. But in Q4, we're trying to sort of stay balanced in our outlook. And so right now, what we have in is roughly similar promotions year-over-year so that we have room to compete in any environment. And so we'll obviously aspire to do better, but the upside that we saw in AUR from Q3 is not currently assumed in Q4. Operator: And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Richard Dickson for closing remarks. Richard Dickson: Thank you, operator. This was an exceptional quarter, and I'm really proud of this talented team that continues to deliver quarter after quarter. As we look to finish the year strong, our team is fired up and our focus is clear: continue to execute with excellence and win with the customer this holiday. Thank you for joining us today. For those of you who celebrate wishing you a happy Thanksgiving, and we look forward to seeing you in our stores this holiday season. Thanks all. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Greetings. Welcome to the Aehr Test Systems Fiscal 2026 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jim Byers of PondelWilkinson, Investor Relations. You may begin. Jim Byers: Thank you, operator. Good afternoon, and welcome to Aehr Test Systems Second Quarter Fiscal 2026 Financial Results Conference Call. With me on today's call are Aehr Test Systems' President and Chief Executive Officer, Gayn Erickson; and Chief Financial Officer, Chris Siu. Before I turn the call over to Gayn and Chris, I'd like to cover a few quick items. This afternoon, right after market closed, Aehr Test issued a press release announcing its second quarter fiscal 2026 results. The release is available on the company's website at aehr.com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I'd like to remind everyone that on today's call, management will be making forward-looking statements that are based on current information and estimates and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These factors are discussed in the company's most recent periodic and current reports filed with the SEC. These forward-looking statements, including guidance provided during today's call, are only valid as of this date, and Aehr Test Systems undertakes no obligation to update the forward-looking statements. Now with that, I'd like to turn the conference call over to Gayn Erickson, President and CEO. Gayn Erickson: Thanks, Jim. Good afternoon, everyone, and welcome to our second quarter fiscal '26 earnings conference call. I'll begin with an update on the key markets we're targeting for semiconductor test and burn-in with a particular focus on the common growth drivers we're seeing across these markets, which is namely the massive explosion of AI and data center infrastructure. After that, Chris will walk through our financial performance for the quarter, and then we'll open up the call for questions. While second quarter revenue was softer than anticipated, we made significant progress in both wafer-level burn-in and packaged-part burn-in segments and are very excited about our prospects moving forward. Based on customer forecasts recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be between $60 million and $80 million, which would set the stage for a very strong fiscal '27 that begins on May 30. During the quarter, we made substantial progress with wafer-level burn-in engagements and production installations across AI processors, flash memory, silicon photonics, gallium nitride and hard disk drives. We're encouraged to see that one of our key growth strategies focused on reliability solutions for the exploding demand for AI and data center infrastructure is beginning to bear fruit. In packaged-part burn-in, we secured key new device wins for our Sonoma system supporting high-temperature operating life qualifications for AI devices. These wins are expected to drive additional capacity at test houses, including at least one customer that has elected to move into production in late calendar '26, which we believe could result in meaningful volumes of Sonoma production systems. In addition, in the last month, we received a very large forecast from our lead Sonoma production customer for AI ASIC production capacity. This forecast is expected to drive very strong and potentially record bookings for the company this fiscal year and position us well for significant revenue growth next fiscal year with their requested shipments starting in the first fiscal quarter of our next fiscal year. Taken together, our increased visibility across multiple end markets gives us great confidence in our outlook. As a result, we're reinstating financial guidance in fiscal '26, which we'll touch on later in today's call. Now let's talk about our key segments. Starting with our wafer-level burn-in during the quarter, we expanded engagements and completed additional production installations across several end markets. Our lead AI wafer-level burn-in customer continues development of its next-generation processor and is currently discussing additional capacity with us. They're forecasting additional system and WaferPak capacity orders this fiscal year and plan to transition to our fully integrated automated WaferPak aligner for 300-millimeter wafers. We expect this customer to continue scaling and excited to support their growth. We also announced a strategic expansion of our partnership with ISE Labs during the quarter to deliver advanced wafer-level test and burn-in services for next-generation high-performance computing and AI applications. This partnership accelerates time to market, improves performance and gives customers the option of either packaged-part or wafer-level test and burn-in for their production volumes. ISE, together with its parent company, ASE, represents the world's leading outsourced semiconductor assembly and test or OSAT platform, serving a global roster of top-tier semiconductor customers. As part of our benchmark evaluation program with a top-tier AI processor supplier we announced last quarter, we completed development of our new fine-pitch WaferPaks for wafer-level burn-in of high-current AI processors. These are currently in test with this potential customer's processors and are designed to validate our FOX-XP production systems for wafer-level burn-in and functional test of their high-performance, high-power AI processors. We're currently completing start-up procedures such as power-up sequencing, thermal profiling, test vectors, timing and high-speed differential clocks and expect to complete data collection this quarter. While we're demonstrating our new fine-pitch high-current WaferPaks for this benchmark, many customers can utilize lower-cost WaferPak designs if certain design for test rules are incorporated upfront. These approaches reduce cost and lead time and are especially attractive to customers focused on faster time to market for wafer-level high-temp operating life qualification. We also have 2 additional AI processor companies planning wafer-level benchmark evaluations since last quarter's earnings call. These benchmarks typically take about 6 months, and we expect to make meaningful progress beginning this quarter. Both customers are evaluating wafer-level test and burn-in as an alternative to packaged-part or system-level test for large advanced AI modules that combine multiple AI accelerators and stacked high-bandwidth memory. Moving burn-in upstream to the wafer-level significantly reduces cost and yield risk by avoiding scrapping expensive substrates and memory stacks when early failures occur later in the process. We have seen estimates that show the cost of the substrate is more than a single processor and the cost of the high-bandwidth memory is even higher. Turning to flash memory. We completed our wafer-level benchmark with a global leader in NAND flash just prior to the holidays. The customer has now taken the wafers back for further processing to validate correlation with their internal process. This benchmark demonstrated our ability to test flash memory wafers with significantly higher parallelism and power than is possible using traditional probers and group probers from companies such as TEL or ACCRETECH. We've also proposed a next-generation solution enabling test of a new emerging flash memory device called High Bandwidth Flash or HBF, designed for AI workloads. This proposed solution leverages our FOX-XP platform, WaferPaks and auto-aligner technology and would support single touchdown high-power test on 300-millimeter wafers. While development of this system would take over a year following customer commitment, we believe this represents a compelling entry point into a large and evolving memory market. We look forward to sharing more details as this progresses. Turning to silicon photonics. We believe that silicon photonics is used -- we believe that silicon photonics used in data center and also chip-to-chip I/O is going to be a significant market driving production burn-in capacity for our FOX wafer-level burn-in systems and WaferPaks. Our lead customer has now firmed up its production ramp, which we expect to begin early next fiscal year. While this timing is later than previously expected, it aligns with recently announced AI processor platforms and positions us well for calendar 2026 orders and deliveries in fiscal '27. We've also finalized a forecast with another major silicon photonics customer initially targeting data center applications with a road map toward optical I/O. We expect to book their initial turnkey FOX system soon with delivery planned for May of this year. In gallium nitride power semiconductors, we continue to support our lead production customer, though we experienced delays related to unanticipated high-voltage fault conditions that required WaferPaks and protection circuit redesigns. This delayed approximately $2 million in WaferPak shipments from last quarter into this quarter, along with some in-system -- along with some system enhancements. Shipments have now resumed and lessons learned have significantly strengthened our GaN power supply burn-in capability. If anyone tells you that testing and burning-in full wafers of GaN power semiconductors with up to 600 volts or more is easy, don't listen to them. We also continue to engage with multiple new potential GaN customers and are developing WaferPaks for several new device designs that are expected to go to high-volume production for applications like data center infrastructure and power delivery, automotive electrical power distribution on both ICE and hybrid electric vehicles and even power semiconductors used for electrical breakers. Aehr has a unique solution that can deliver full turnkey, fully automated wafer handling and probing for test and burn-in of GaN wafers in sizes from 6 to 8 inches and even 12 inches or 300-millimeter wafers. Turning to silicon carbide. As we previously discussed, silicon carbide demand has been weighed toward the end of this fiscal year. Customers continue to be optimistic about this market and their capacity needs. But we've tried to take a very conservative stance that is mostly show us the orders before we believe them. Our lead customer recently transitioned from 150 millimeters to 200-millimeter wafers, nearly doubling output without adding new FOX-XP systems and supported by Aehr's proprietary WaferPaks that we developed to accommodate both 150 and 200-millimeter wafers contacting 100% of the die on each in a single touchdown. They're now seeing additional needs for WaferPaks this year, but additional capacity for systems appears to be a year out. We pushed out expected orders until next fiscal year from our near-term forecast, but have capacity of systems or WaferPaks to continue to support their surge capacity needs as well as our other silicon carbide customers. While electric vehicle-related demand has slowed industry-wide, we remain well positioned with the most competitive wafer-level burn-in solution available, and we expect to benefit when growth resumes. In semiconductors used in data center hard disk drives, we're installing the additional FOX-CP systems for a major supplier of hard disk drives for wafer-level burn-in of their special components in their drives. They've indicated plans for additional purchases later this calendar year. While their device unit volumes are very large, the overall revenue opportunity remains modest due to short stress times and the massive parallelism achieved on our FOX-CP system and proprietary high-power WaferPak wafer contactors. Now let me talk about packaged-part burn-in. We're seeing continued momentum in packaged-part qualification and production burn-in for AI processors, driving growth in our new Sonoma ultra-high-power packaged-part burn-in systems and consumables. As we announced today in a separate press release, during our fiscal third quarter to date, we have received orders from multiple customers totaling more than $5.5 million for our Sonoma ultra-high-power packaged-part burn-in systems, including initial orders from a premier Silicon Valley test lab for our newly introduced higher-power configured Sonoma system that can also support full automation. These orders already exceed the total Sonoma orders for the entire second quarter, highlighting the accelerating demand we're seeing for our package-level burn-in of high-powered AI and compute devices. This quarter, we also secured key new device wins on the Sonoma platform for high-temp operating life qualification. These wins are expected to drive additional capacity at test houses, with at least one customer planning to transition to production later this calendar year, generating significant system demand. Our lead packaged-part burn-in production customer for AI processors continues to ramp and is forecasting substantial growth in 2026 and beyond. Although we have not yet received the purchase order, we have received a substantial forecast from this customer for AI ASIC production capacity with requested Sonoma production, packaged-part burn-in system and BIM shipments beginning in the fiscal first quarter of '27. That starts May 30, which we expect to contribute to very strong bookings in fiscal '26 and generate significant revenue growth in fiscal '27. This customer also plans to introduce much higher power ASICs later this year for which we are already developing the high-temp operating life qualification burn-in modules and sockets to be used on the Sonoma systems at one of the premier Silicon Valley test services companies that have many systems installed. This AI accelerator ASIC processor is also forecasted to go to production burn-in and drive even higher volume needs for production burn-in systems downstream at the OSATs in Asia. We feel we're very well positioned with our Sonoma system for this production capacity need and believe this could drive very substantial volumes of Sonoma systems in our next fiscal year. During the quarter, we completed development of a next-generation fully automated higher-power Sonoma system, supporting up to 2,000 watts per device. This system enables continuous flow operation, improved throughput and seamless transition from qualification to high-volume production using the same fixtures and sockets. These capabilities enable customers who are focused on high-temp operating life reliability testing to have a system that is fully software and hardware compatible with the Sonoma systems they have installed, which simplifies and accelerates time to market that is critical for HTOL testing of new AI processors. This Sonoma burn-in system can also simply bolt on a fully automated handler developed and sold by Aehr Test as a turnkey solution to allow hands-free operation with less than a couple of minutes of overhead per burn-in cycle, which is amazing for production burn-in needs. We're also seeing increased demand for our lower-power Echo and Tahoe packaged-part burn-in systems, driven by our installed base of more than 100 systems across over 20 semiconductor companies worldwide. But I'll wait for another call to discuss these systems and the markets they serve in more detail. As stated last quarter, the rapid advancement of generative AI and the accelerating electrification of transportation and global infrastructure represent 2 of the most significant macro trends impacting the semiconductor industry today. These transformative forces are driving enormous growth in semiconductor demand while fundamentally increasing the performance, reliability, safety and security requirements of the devices used across computing and data infrastructure, telecommunications networks, hard disk drive and solid-state storage solutions, electric vehicles, charging systems and renewable energy generation. All these -- as these applications operate at ever higher power levels and an increasingly mission-critical environments, the need for comprehensive test and burn-in has become more essential than ever. Semiconductor manufacturers are turning to advanced wafer-level and package-level burn-in systems to screen for early life failures, validate long-term reliability and ensure consistent performance under extreme electrical and thermal stress conditions. This growing emphasis on reliability testing reflects a fundamental shift in the industry from simply achieving functionality to guaranteeing dependable operation throughout a product's lifetime. A requirement that continues to expand alongside the scale and complexity of next-generation semiconductor devices. This year, we're making significant progress expanding into additional key markets for our semiconductor test and burn-in solutions, including AI processors, gallium nitride power semiconductors, data storage devices, silicon photonics integrated circuits and flash memory. This diversification of our markets and customers is significant given our revenue concentration in silicon carbide for electric vehicles the last 2 years. This progress and key initiatives expands our total addressable market, diversifies our customer base and provides us with new products, capabilities and capacity, all aimed at driving revenue growth and increasing profitability. The progress we made this quarter with a significant number of customer engagements and production installations provides improved visibility into future demand. As a result, we're reinstating guidance for the second half of fiscal '26. For the second half of fiscal '26, which began November 29, '25 and ends this May 29, '26, Aehr expects revenue between $25 million and $30 million. As stated earlier, although we're not providing formal bookings guidance, based on customer forecast recently provided to Aehr, we believe our bookings in the second half of this fiscal year will be much higher than revenue between $60 million and $80 million in bookings, which would set the stage for a very strong fiscal '27 that begins on May 30, 2026. With that, let me turn it over to Chris, and then we'll open up the lines for questions. Chris Siu: Thank you, Gayn, and good afternoon, everyone. I'll begin with bookings and backlog, then walk through our second quarter financial performance, cash position, outlook and investor activity. The company recognized bookings of $6.2 million in the second quarter of fiscal 2026 compared to $11.4 million in the first quarter. At the end of the quarter, our backlog was $11.8 million. Importantly, during the first 6 weeks of the third quarter, we received an additional $6.5 million in bookings. This increase was driven primarily by an order from a premier Silicon Valley test lab for our newly introduced high-power configured Sonoma system, which we announced this afternoon. Including these recent bookings, our effective backlog has now grown to $18.3 million, providing increased visibility as we move through the remainder of fiscal 2026. Turning to our second quarter results. Revenue was $9.9 million, down 27% from $13.5 million in prior year period. The decline was primarily driven by lower shipments of WaferPaks, partially offset by stronger demand for our Sonoma systems from our hyperscaler customer. Contactor revenues, which include WaferPaks for our wafer-level burn-in business and BIMs and BIBs for our packaged-part burn-in business totaled $3.4 million, representing 35% of total revenue. This compares to $8.6 million or 64% of revenue in the second quarter last year. Non-GAAP gross margin for the second quarter was 29.8% compared to -- with 45.3% a year ago. The year-over-year decline reflects lower overall sales volume and a less favorable product mix as last year's quarter included a higher proportion of higher-margin WaferPak revenue. Non-GAAP operating expenses in the second quarter were $5.7 million, down 4% from $5.9 million in Q2 last year. The decrease was primarily due to lower personnel-related expenses, which were partially offset by a high research and development costs, including high project spending as we continue to invest resources in AI benchmark initiatives and memory-related programs. As previously announced, we successfully closed the Incal facility on May 30, 2025, and completed the consolidation of personnel and manufacturing into Aehr's Fremont facility at the end of fiscal 2025. During the quarter, we negotiated an early lease termination with the landlord, reducing our obligation by 5 months of rent. As a result, we recorded a reversal of $213,000 related to a previously accrued onetime restructuring charge. During the quarter, we recorded an income tax benefit of $1.2 million, resulting in an effective tax rate of 27.3%. Non-GAAP net loss for the quarter, which excludes the impact of stock-based compensation, acquisition-related adjustments and restructuring charges was $1.3 million or negative $0.04 per diluted share compared to net income of $0.7 million or $0.02 per diluted share in the second quarter of fiscal 2025. Turning to cash flow. We used $1.2 million in operating cash during the second quarter. We ended the quarter with $31 million in cash, cash equivalents and restricted cash, up from $24.7 million at the end of Q1. The increase was primarily due to proceeds from our at-the-market equity program. As a reminder, in the second quarter of fiscal 2025, we filed a new $100 million S-3 shelf-registration that was approved by the SEC for 3 years, followed by an ATM offering of up to $40 million. During the second quarter of fiscal 2026, we raised $10 million in gross proceeds through the sale of about 384,000 shares. At quarter end, $30 million remained available under the ATM. We intend to utilize the ATM selectively with a disciplined approach focused on market conditions and shareholder value. Looking ahead to the second half of fiscal 2026, which began on November 29, 2025, and ends on May 29, 2026, we expect total revenue between $25 million to $30 million and non-GAAP net loss per diluted share between negative $0.09 and negative $0.05 for the 6-month period. On the Investor Relations front, last month on December 17, 2025, Lake Street Capital initiated analyst research coverage on Aehr Test, along with equity research firm, Freedom Broker, which initiated coverage last June. There are now a total of 4 research firms covering the company. Lastly, looking at the Investor Relations calendar. We will meet with investors at the 28th Annual Needham Growth Conference in New York on Tuesday, January 13, and then return to New York in February for the 15th Annual Susquehanna Technology Conference on Thursday, February 26. We will also be participating virtually in the Oppenheimer Emerging Growth Conference on Tuesday, February 3. We hope to see you at these conferences. That concludes our prepared remarks. We're now happy to take your questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from Christian Schwab with Craig-Hallum. Christian Schwab: What wasn't clear to me exactly is on the booking strength -- potential booking strength of $60 million to $80 million in the second half of this fiscal year. Is that almost entirely on the AI accelerator processor line? Gayn Erickson: There's some silicon carbide, not much, like not very much at all. There is some silicon photonics for sure. But the bulk of it is across wafer-level and packaged-part burn-in for AI processors, yes. Christian Schwab: Okay. Perfect. And then given that such a material bookings from the AI processor market, can you give us any indication or idea? I know we've talked about the opportunity in that marketplace being bigger than silicon carbide. But let's narrow it down to kind of a multiyear time frame kind of including '27 and '28. Do you see that business after initial orders expanding meaningfully from there? Gayn Erickson: We do. We do. And we've been taking a pretty conservative stance on how large, particularly the AI and the wafer level side of it is. And I want -- conservative may not be fair. Candidly, we're still trying to get our arms around how big it is. What we get is visibility of a specific GPU or CPU or network processor or an ASIC. And then we hear these things from the customer and then we look externally and what are they telling the Street and try and correlate to those lookups. And I'd say pretty consistently, we hear bigger numbers from the customer than the Street. I'm not sure what that all means, okay? And then as they give us test time estimates of what the burn-in conditions are, we can start to put some numbers around it. But a single processor for some of these big guys at wafer-level burn-in is 20, 30 systems or so. And these are $4 million, $5 million machines. So you get a feel for the size of what that looks like. And the estimates of -- today, if you were to look at AI spend in test between test and burn-in, is it $8 billion, $10 billion to maybe $15 billion or so. I mean it's a really large number. So we don't want to get ahead of ourselves here. But when customers ask you things like how many can you make, right? So can the AI business be measured in hundreds of millions of dollars for Aehr Test a few years out? Yes. for sure. Now what's interesting is that we're in this -- I think it's an awesome position to be in because our -- the Sonoma system is a highly preferred system for HTOL, the high-temp operating life reliability testing for these AI processors. It has the largest installed base in all the test houses around the world. We're getting people that approach us because we are the -- we are like -- I don't want to say we're the de facto standard, that's probably bold, but we have more capacity than everybody else. And therefore, they are saying, you're kind of the go-to guy. I like those words. And so -- and we can build lots of them. So customers are using that, and we get a front row seat to actually bring them up. Then we say, "Oh, by the way, if you want, you can take this machine, add production handling to it and do production on it." In the meantime, if you come to our facility and you do a tour and you can see that production test cell for the Sonoma automation, we, of course, will walk you by a FOX wafer-level burn-in test cell and mention, "Oh, by the way, that happens to be doing a benchmark on a 300-millimeter wafer, we can't tell you who it is." And so they're like, well, what is that? So we are in a position to be able to talk about both of them. And the ASPs are actually higher on the wafer-level side of things. And -- but the value proposition way outweighs that because of the yield advantage of doing at wafer level. The yield savings [ dwarfs any of the ] costs or the cost to test the wafer-level burn-in. So as we get our arms around the market, the market data that would be out there would be packaged part because no one is doing wafer level except for us. And so we're creating our own models related to, okay, for that unit capacity, if you went to wafer-level burn-in, what would that look like? Kind of similar to what we had to go through in the original silicon carbide side of things of -- if the whole market -- and we're not seeing -- everybody including NVIDIA and Google and Microsoft and Tesla and these guys all went with us how big is that market? We haven't really tried to put our arms around that yet, but it's substantial. Christian Schwab: Great. And then I guess one last question, if I may, and follow up on your comment about capacity. How many systems do you think you're capable of manufacturing in a year for wafer level? Gayn Erickson: We have talked to customers about capacities exceeding 20 systems a month at either package or wafer level. If we had to, we could ship 20 systems a month of each during this calendar year. Now that's bigger than our forecast by a lot. But you know what, when people are saying, could you do something like this and intercept something, it's like if they gave you an order for 50 or 100 Sonomas, like how long is it going to take you to build them? Makes sense? Christian Schwab: Makes perfect sense. No other questions. Operator: The next question comes from Jed Dorsheimer with William Blair. Jonathan Dorsheimer: Yes, I guess maybe just to start, on the wafer level, I think your prior comments around the timing of the benchmark, it seems like that's taken a little bit longer. And I'm just wondering, is that a function of -- is it because it's new and what you're seeing is from the customer is that they're changing parameters that's extending that out? Because I think you had maybe talked about by February time frame, and we were almost... Gayn Erickson: Do you want me to throw my customer under the bus? Is that what you're trying to tell me, but... Jonathan Dorsheimer: No, no, no... Gayn Erickson: Let me answer that. No, I got it. I got it. No, that's totally fair, okay? What I do in all of these things is try to describe exactly what we feel, what we know, what we knew at the time. This -- one of the things that's very interesting and fun about this particular customer who is a very notable customer, okay? When they gave us, and I don't think I'm [ overstating, ] when they gave us the vectors, the test vectors, et cetera, they were giving it off of a platform from package level, okay? Package and wafer are different. We had a huge arm wrestle with them related to what they could actually do at wafer level and ultimately, we're able to demonstrate to them significant DFT, lower pin count modes, et cetera, to be able to do it at wafer level, which was a big deal because they never understood that because, of course, nobody has ever done this before with us, okay? I'll just leave it at this. They actually gave us some things that were implied based upon package that didn't really weren't totally applicable to wafer level, and we struggled with some of that. And it turns out -- so it actually did delay a little bit. I think they -- it's mutually understood. It's like, "Oh, sorry, that we were thinking in package, we forget about wafer and sort." And that's a growing thing. We've seen this with other customers. On the very first time you're doing wafer level burn-in, you just don't think about it from the challenges or the differences at what happens when you're talking about a device that shares common substrates or from a probing environment. So is it longer? Maybe a little bit, measured in weeks or a couple of months or something. But some of the things that like mechanically wafer physical contact to the device using our auto aligner to pack these new fine-pitch WaferPaks, the test plan itself, the vectors, those things were all going along pretty well. So I wish it was a little bit sooner, but I think we're still very much on track to try and get them some data over the next couple of months here or even maybe even this month. So now the question, of course, parlays into what do they do with it? What's the timing? Do you understand what device they want to cut in? We do. We're not going to share that with you guys. are we going to make it? We believe we're still -- there's lots of reasons to actually want to cut in wafer-level burn-in and the sooner, the better. So I'm actually -- we're really excited about this particular one. And then now we've got another couple of guys that are saying, "Pick me, pick me too" and are generating the information to give us so that we can actually do design reviews and walk through a WaferPak design for them as well. Jonathan Dorsheimer: Got it. That's helpful. And I just want to address the potential of cannibalization between package and wafer level. And if I read through your comments, it seems like the AI processor is what's moving along with this customer on the wafer level. You had mentioned briefly actually on the ASIC side. Do you -- are you anticipating that the ASICs basically run with package level and that AI processors are wafer level? Or are you anticipating both at wafer level? Gayn Erickson: Yes. Okay. Okay. So vocabulary for everybody that's’ listening out there, right? So there -- when you talk about processors in the AI, arguably, there's even maybe at least 2 or 3 different broad flavors of them, okay? You're going to have the actual GPU, if it's an NVIDIA or ASIC when you talk about everybody else's. In reality, the GPU is kind of an ASIC at NVIDIA too. Jensen said that at one point. These are AI accelerator platforms, okay? And then there -- and they can be used for large language models or for inference type things. There's also processors that like CPUs, like Intel or Grace or Vera-type CPUs and others that are making them that are also going through a burn-in process. And then there's -- you could argue there's even network processors and things like that. But generally, when we talk about AI processors, we're generally in the CPU and GPU type or ASIC type that are combined together in these AI processor clusters. And things like you hear at GB200 is Grace CPU and 2 Blackwell AI accelerators in 1 package, if you will, or in 1 cluster. What's happening with the road map is that devices are going from a single AI accelerator or CPU on a -- in a package to a package that includes embedded memory, like high-bandwidth memory and high-bandwidth flash over time and then to having more than 1 compute chip in it. So having 2 processors in it or 4 or 8, like you look at the Intel or the AMD road map. Everyone has a road map to 2 or 4 more AI processors on a single substrate. What's happening is that there is a -- the qualification of those are all done today in a full package. The whole device in a big substrate is done, and it can take months to even go to get the packaging and qual that. So there are people that would like to be able to qual the processor inside when it's still in wafer form, right? From a production perspective, the value proposition is you're burning in these devices and when they fail, you take out the other compute chip and all the memory plus the co-os substrate, which costs more than the silicon of the compute chip itself. So the road map is getting more intense. So there's people that are like, oh, I want to evaluate this for this device, this would make sense. But boy, the next one makes twice as much sense and the one next to that is 4x as much sense because of this evolution. So a lot of trends we discussed, okay, is there a window. Like what happens if you just missed this one device, it doesn't feel like that it's a treadmill of you can always step on. And the customers are like, okay, how do I cut you in? I've said publicly that our large package part production customer, we've talked about it as an ASIC hyperscaler. They're actually on Sonoma production. We're qualifying their next device that's going to go to production, we believe and hope it will go on Sonoma as well. okay? The third one that are giving us design files of so we can make sure that Sonoma is ready for that, but they've also said, you know what, by then maybe we want to consider FOX wafer-level burn-in. And an interesting thing is it's like, well, what will you do with all the package systems from us, who cares? It's like, what? Because if I could move it to wafer level, I don't need to do it a package anymore. Now will it cut over just like that, we'll see. I think the world is going to be both for a long time, and we're in a great position to do both. But is there cannibalization? For sure. We had a customer come in who wanted to talk about what we thought was packaged part burn-in. Alberto, our VP over the packaged part business, and I met with them and 15 minutes into the meeting, he goes, I'd like to talk about wafer level. Alberto looked over at me and I'm like, okay, new slides. So at least we got both. And we're in a great position. And actually, I would say it's all 3, we do the high-temp operating life today only at package over time at wafer level, and we do production burn-in either package or wafer level. So a great front row seat. Operator: Our next question comes from Max Michaelis with Lake Street Capital. Maxwell Michaelis: First one for me, just around the bookings guide. I know you previously shared that majority of around AI. But just given the distinction between the low end and the high end, if we just take the midpoint of around $70 million, I mean, what -- to get to that $80 million, is that all basically around AI? Or does that suggest any improvement around silicon carbide or GaN? Gayn Erickson: It's the least in that number is silicon carbide, okay? And then GaN is pretty close. Hard disk drive is a little bigger. Then silicon photonics is a chunk. I mean we've got production systems in there for our production -- our lead customer. We have a new customer that wants a system. They want a chip by May. We're suggesting to them that they really should get their order in before we ship it, joke, joke. I'm kidding, it's a challenge right now because they're like, please, please build it. we actually have a system on our floor. And if they get their PO in if you're listening, you get to get it, if not, we'll give it to the next guy, but anyhow. And then it would be wafer-level burn-in. And then I think package is the biggest. I'm sorry, wafer level burn-in AI and then packaged part AI is the biggest. Maxwell Michaelis: Okay. So -- and yes, that's just actually, the $60 million to $80 million, the $80 million suggests just greater volume orders from wafer level burn-in... Okay. And then lastly, I haven't had time to run through the entire press release, but that $5.5 million order you noted in your prepared remarks. Can you go any -- can you share some more detail on that? Is there anything new that we should be looking for? Or is just kind of standard? Gayn Erickson: You know what, it has a mix of some customers that already had Sonomas that were buying more that were AI related. It had some burn-in modules. That was important because it was for a new design of a really expected to be high runner that's going to production. It has a big order from a what we call our a premier Silicon Valley test services company, we'll leave it to that. They actually bought a number of the new Sonoma configurations, which are the very high power ones that allow them to go to 2,000 watts. We have some devices that we're going to be testing this spring that are almost 2,000 watts per device, right? And everybody is out there talking about how can you do -- what does it take to get to 1,000 watts, we're jumping right past that. And this is in a high-volume Sonoma system. So they'll be able to test a large number of devices in that system. And I'm trying -- I think the numbers I should note this number. I think it's 44 devices. But I mean it's a large number of devices to be able to test those. And it's -- by the way, it's either 22 or 44. I should know that. Sorry, folks. Go through the math on that particular application because of the number of resources and power supplies and things. But it's the biggest part we've seen that's in development, and that's going to be going to production. So that's a big deal. So it's a combination of several different orders. Every one of them is kind of sort of strategic to us. Operator: The next question comes from Larry Chlebina with Chlebina Capital. Larry Chlebina: We try to line up your ramp or at least your demand for the systems that you're working on developing for these customers on the AI processors with what's publicly disclosed in terms of the product launch. Is there a case where they may start up on packaged part wherever they have the capacity to do that. And then when they feel comfortable, maybe if it's after the products launched, would they cut over the wafer level burn-in because it's so much more efficient and saves them money? Would they do that? Or would they just do it initially on a brand-new product launch at the beginning? That's kind of -- do you have a sense of that? Gayn Erickson: Okay. So I wouldn't -- there's 2 things in there. What I definitely see happening is we know for a fact a customer was doing system level or rack test, okay? The only time they identified infant mortality or early life failures was when it's installed in the data center pretty nasty okay? That's test or not or burn-in. So they said, we'll run it for 2 weeks, and it hasn't died we'll accept it kind of thing, and then they'll actually plug it into the network, pretty expensive way of doing it. Then there are companies like AEM and Advantest and Teradyne that have talked about system-level test machines, which is a type of ATE machine, that is designed to be doing a high-speed insertion and boot up like the operating system. It's a great way to do a very high degree of test coverage for a specific application. People were saying, oh, we're going to do burn-in with that. Well, that doesn't really -- those systems are designed for high speed. They're designed to be at the user mode. They're designed to run cold. They're not really designed for burn-in, and they're quite expensive and large. But the market was pulling on that because it's sure better than doing it in a rack. And there wasn't another system available in what a lot of people refer to us as ovens, which is a large-scale system that you put lots of burn-in modules or trays with lots of devices and test all at once. Those were like from KYC or maybe 600 watts and below or something. And there really wasn't a tool out there for that. This is where Sonoma was pulled up because we were doing -- Incal was using it for the Hi-Tec operating life, but it's like, well, wait a minute, can I use that in production? Can you add automation? Can you do these things support? And can you quadruple or 50x your capacity? So that's where Sonoma is coming in. When Sonoma enters that market doing system-level test or rack test makes no sense whatsoever. So it's highly competitive as that. Now having said that, wafer-level burn-in is even better. But a lot of people may say, well, I need to think through that. Where do I put that insertion, I might need to implement some design for test modes to be able to implement it at least to take advantage of the very low cost full wafer contactors from Aehr Test and things like that. So I think it's an evolution. But I think the conversation we have with customers is they're like, I need package for burn-in, let's talk about that. But boy, wafer-level burn-in would be better, how do we engage on that? And then specifically on a per customer basis, I don't want to get too carried with our strategy. But if you have an installed base of something, a packaged part burn-in systems or I could go in and displace you with maybe Sonoma but it's probably better for me to go displace you with wafer level burn-in because it's not even a price thing in that sense. It's yield. It's so -- or capacity. So we -- it depends on the customer, and we have some customers that have some devices that want to think about wafer level, something they want to think about package, something they want to think about package and then eventually the wafer level over time. I hope that was -- as I look back, that was pretty confusing. But there's -- it's an evolution of it. And guess what we do, the customer is always right. You tell me what you want and we're in. Larry Chlebina: Well, if the -- if you -- all these evaluations, they have going on with wafer level burn-in, if it takes longer and the product ends up getting launched, would they still cut over to some portion of the production on wafer level burn-in once it's proven out for the particular product or the predictor -- would they do that midstream? Gayn Erickson: I think it depends -- I don't -- it's not a slam dunk. I mean, I think traditionally, people will start a product and do the release of that one product on one test platform or something. And then you cut in on the next one. I think that'd be fair to say, but there are certain devices we know that their intended application, there's 2 or 3 different applications for it. So for a large language model, maybe they think about it one way, but if it's going to be automotive, then that's a different thing, right? So even within a product, there might be an evolution or they get by until they can implement wafer level burn-in. That particularly comes in the fact when you think about a multichip module, right? As soon as you could do wafer-level burn-in, if I could save you 1% yield per die on a 4-die AI processor that has a $15,000 BOM. Of course, you would do that, right? Larry Chlebina: I'm not sure if they would. Gayn Erickson: Yes. So we're trying to be as open as we can. We know as much as we know, but there's definitely advantages to do wafer level. I mean ultimately, that's the most -- kind of the best place you could ever do it. And if you implement some DFT and some of the things we do, I can build you a WaferPak in 8 weeks. Have you on wafer. Larry Chlebina: I'll shift gears on the flash benchmark that you completed right a little bit ago before holidays. When do you expect the customer to get back to you and more importantly, when do you expect them to come with an order. Gayn Erickson: I was waiting for somebody. Yes, that's where my head's at, too. My guess is, Larry, in the next couple of months or so for them really to get back, depending on how they -- the wafer is going back to test, which is tested at wafer. I don't think they're going to package it up and go through some stress qualification, that might be something. But we've already had some design reviews with them on our new tester and planted the seeds, they were very impressed is how I would describe it. The big trend -- the big shift here was when we even started this thinking to do the benchmark with them, which is what like a year ago, if I get that right. Larry Chlebina: Yes, over 1.5 years ago. Gayn Erickson: Yes. Yes. Fair enough, right? When we were starting to even build up to get the design files and what wafer we are going to be testing with them, it was not aimed at high bandwidth flash because that didn't even exist, right? They were looking at it for like commodity data center SSDs. Now with the HBF, it broke their infrastructure, the power supplies, IO pins, et cetera, and parallelism, and now they have a power problem, which we love. Well, we're good at power. So people that have power problems that's music to our ears, so yes. Larry Chlebina: I recall you originally said the driver, their motivation was as the 3D NANDs got higher levels of -- they're even talking about getting the 400 level. Gayn Erickson: Layers, layers, yes. Larry Chlebina: Layers, that required more power and exceed the power in their existing systems so that they need your high power. So here we are 1.5 years later. And so how are they getting by to this point? And don't they need your high-power capability? Gayn Erickson: They're doing -- they're having to -- they can't test a whole wafer in one touch down as an example. But that -- what I described there, which people -- if you follow along with that, that was actually referred to as hybrid bonded flash same letters by the way, right? Hybrid bonded flash was a novel idea that the base substrate layer was logic done on the logic process and then you build up just the stacked memory, and you do that in a memory process and then you bond them together. The result of it is that memory stack is a taller building with a smaller footprint, so you get more die per wafer. That's good, right? But the power was much higher, HBF as in high-bandwidth flash is, in some ways, architecturally similar, except for its more power because of its speed it has additional power supplies, and it's taller, it actually is even more of a problem for them, which I guess, if you're a tester guy, the bigger the problem, you have more to solve. But we had to go back and redesign the tester because we were originally aiming it at the other device. Larry Chlebina: I would think they would need more capacity for the enterprise flash part of it before they ever start needing something for HBF. So the enterprise flash, I'm wondering when is something going to happen there? It seems like it's overdue. Gayn Erickson: Yes. I mean our goal, in this case, would be -- we had originally hoped to finish the benchmark at the end of last year, okay? So like we're 6 months later. And I think as shared with you, if you read through all of the notes, around March, it was like it felt like you're pushing a rope, something was going on. If you knew who the company was it'd be the very obvious what was going on, okay? But that what really happened is they kind of shifted from enterprise focus to HBF. And so that slowed some things down in terms of even reviewing our tester. And then they came back to us in the summer and we're like, okay, here's the new tester we'd like. So okay, maybe that's good. It's for people that you're tapping your fingers, it's taking a long time, but that's part of what happened there. But at this point, again, we walked up there actually -- they thought we were just going to take their wafer and stick it into one of like our NPs with a manual setup and we showed them a fully integrated machine. So they walked up and we put their wafer at a FOP, put the FOP onto the Sierra automated WaferPak Aligner, ran the wafer. It opened up the blade, stick the wafer -- put the wafer in the WaferPaks, put the WaferPaks in the blade, close the blade, ran the tests, gave them the results. It's pretty impressive. Larry Chlebina: So you're ready to go for production. So it seems like they need. They're going to need more capacity based on everything that's going on in the memory market. Gayn Erickson: Exactly. And right now, they're all flushed with margins. How is that, right? So I agree, you know what, we've been, Larry, you as people that follow Larry is our greatest cheer leader, along with me in memory strategy for us. We are spending money, okay? It is part of -- as Chris alludes to, we could be doing better, well, at these revenue levels, this is -- we're not happy with these revenue levels, right? We're not making money at these levels. But we would be making more money. We're spending money. We got our foot on the gas. And in fact, it's our expectation that we'll increase the R&D spend particularly in the AI wafer-level burn-in, a little bit in the package because we spent a lot of money on that in just this last year for package getting this new product out and then the memory system which will be a blade in our FOX system basically. Larry Chlebina: It should be -- it should pay off. Let's -- so hopefully soon, sooner rather later. Gayn Erickson: I vote yes, too. As a shareholder, I think it's good money to be spent. Larry Chlebina: That's all I have. Thank, Gayn. Gayn Erickson: Thank you, Larry. Operator: [Operator Instructions]. Okay. I'm showing no further questions in the queue. I would like to turn the call back to management for closing remarks. Gayn Erickson: Thank you, operator, and thank you, everybody. We really appreciate you guys taking the time to spend an hour with us. I think about that exactly again. And we'll keep you guys updated. Stay tuned. We're really excited about this and hope that the orders will come in shortly enough to be able to make this less dramatic as we go forward and set us up for a really strong year heading into next year. So I appreciate it. If you are in town, we are in Fremont, California, Silicon Valley, give us call, set something up, come by take a look at the facility. If you haven't seen our tools, they're very impressive and get a feel of the capacity because we have a lot of systems on the manufacturing line right now. So take care, and Happy New Year to everyone. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. This is the conference operator. Welcome to Aritzia's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead. Beth Reed: Thanks, operator, and thank you all for joining Aritzia's Third Quarter Fiscal 2026 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. As a reminder, please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed management discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer. Jennifer Wong: Thanks, Beth, and good afternoon, everyone. I hope all of you had a wonderful holiday season. I'm pleased to share that Q3 of fiscal 2026 was another standout quarter. Our teams executed on our strategic growth levers at a high level across the entire business, and our strong momentum has continued into the fourth quarter with record-breaking results over the holiday shopping season. In Q3, we achieved for the first time ever $1 billion quarter. Total net revenue of $1.04 billion was well above the top end of our guidance range. Sales in October and November exceeded our expectations, particularly as we started to lap the exceptional top line growth beginning at the end of Q3 last year. On a 2-year stack, trends accelerated sequentially throughout the quarter. This was fueled by broad-based strength across channels and geographies. The unparalleled demand for our everyday luxury offering, combined with our digital initiatives, new boutique openings and strategic marketing investments drove a 43% top line increase over last year. We're extremely pleased with our performance across both channels, with net revenue increasing 58% in e-commerce and 35% in retail. Comparable sales grew an outstanding 34% fueled by double-digit positive growth in all channels and all geographies, led by our U.S. e-commerce business. The holiday season was off to a great start as we delivered another record-breaking Black Friday event. Retail sales in both Canada and the United States hit all-time daily highs with nearly 60% of our boutiques, achieving all-time sales record. E-commerce sales in both Canada and the U.S. also hit record daily highs. In addition, we benefited from lower markdowns compared to last year's event driven by increasing affinity for our brand, broad-based demand for our product and our strong inventory position. During the quarter, our performance in the United States continued to drive our overall results. In Q3, we generated a 54% increase in U.S. net revenue. This highlights the extraordinary demand for our product and the tremendous momentum of the Aritzia brand. Our results were fueled by accelerated growth in e-commerce, supported by the launch of our mobile app and our investments in marketing. In addition, our new and repositioned boutiques over the last 12 months continued to perform well. We also generated outstanding comparable sales growth in our existing boutiques. In Canada, we accelerated our sales growth for a fourth consecutive quarter. We achieved a 29% increase in net revenue in Q3. This was fueled by exceptional performance in e-commerce and strong comp growth in our boutiques. In our retail channel, we delivered net revenue growth of 35%. This was driven by the success of our real estate expansion strategy and strong boutique comp growth in both countries. Over the past 12 months, total retail square footage growth was in the high teens. We opened a total of 13 new and 4 repositioned boutiques. This included 5 new boutiques in the third quarter, all in the United States as well as the reposition of our Flatiron flagship. The strong comp growth in our boutiques continue to be primarily driven by traffic. This was fueled by the increasing affinity for our brand, which we supported with our strategic investments in marketing. Our real estate expansion strategy continues to yield exceptional results. This underscores the vast opportunity for growth in the United States, where we have just 72 boutiques today. The boutique we've opened in the U.S. in fiscal 2026, they are tracking to payback in less than 1 year on average. This continues to be our target of 12 to 18 months. In Q4, we expect to open 4 new boutiques in the United States. These include locations in Cincinnati, which is a new market for us as well as in Las Vegas, Los Angeles and Scottsdale. We've also already opened and repositioned boutiques in Laval, Quebec. Our immersive retail experience is truly unmatched. This includes our operational store design, passionate style advisers, incredible cafes and of course, our beautiful product. Our boutiques, particularly our flagship are the best showcase of the Aritzia everyday luxury brand ethos. In November, we opened our third New York City flagship located right in the heart of Manhattan's iconic Flatiron District. It's just a couple of blocks away from our original boutique, which opened in 2015, and now a decade later, our new space is nearly 2x larger and it includes it's very own AOK Cafe. To celebrate, we hosted a series of exclusive events, which garnered significant social and media coverage, amplifying the enthusiasm for our brand and introducing Aritzia to new audiences. Every flagship marks a major milestone for our business. With every launch, we've raised the bar, refining and perfecting our strategy along the way. Our Flatiron flagship is a testament to that progress, celebrating the passion, collaboration and drive of our team as we continue building momentum and shaping our success across the United States. In e-commerce, we delivered an increase in net revenue of 58%. This was driven by the increasing appreciation for our brand as well as the successful launch of our mobile app. Our focus on full funnel marketing continued to fuel website traffic, which increased meaningfully in both countries. We also continue to benefit from site enhancements, operational improvements and higher omnichannel engagement. The launch of our mobile app at the end of October achieved exceptional results and surpassed even our highest expectations. We drove strong adoption and excitement with elevated marketing and an exclusive product drop that sold out in just 1 day in the U.S. The Aritzia app was the most downloaded app in the entire app store on its first day. In Canada, it remains the #1 shopping app for 9 days straight. In the U.S., it was #1 for 4 days. Total downloads to date are more than 1 million, far exceeding our expectations for the entire first year and reflecting the love clients have for our brand. Clients were quick to discover the value the Aritzia app provides to them, including greater access to our product assortment, styling expertise and guidance and exclusive product and content. This is driving increased conversion and helping further fuel the momentum in our e-commerce business. We've already launched new app features and updates to elevate the client experience with many more to come. In addition, our new international e-commerce website continued to perform well. Sales in the quarter more than doubled compared to Q3 last year. This enhanced shopping experience is already fueling higher revenue growth through increased conversion. Turning now to product. Throughout the third quarter, our assortment continued to resonate with clients across both Canada and the United States. Our fall and winter launch was exceptionally strong. We saw a positive client response across our iconic franchises, new styles and new colors. We offered excitement through the launch of the app, including collabs and drops such as the Nike Aritzia collab and the multiple color [Sweatleece drop]. In addition, we remain well positioned with the right inventory in the right place to drive sales. Our rigorous focus on inventory and the exceptional demand for our brand enabled us to deliver an improvement in the year-over-year markdown rate and higher full price sell-through. We continue to refine our integrated marketing approach to help grow awareness, build brand affinity and emphasize the features behind Aritzia's unique value proposition. These include our high-quality beautiful products, our aspirational shopping environment and our engaging client service and our captivating communication, all at attainable price points. We're reaching more and more new clients while reinforcing our connection with existing clients. This is a key contributor to the outstanding momentum in our business. In the quarter, we also continued to leverage product collaborations to introduce Aritzia to new audiences. This further amplifies our brand and creates interesting moments to captivate our clients. In Q3, this included the partnership with Nike as well as our collab with Salt & Stone. Both of these created excitement and helped drive traffic online and in our boutiques. As I mentioned earlier, our strong performance has continued into the fourth quarter with another record-breaking holiday period. Excellent operational execution across our 3 strategic growth levers, geographic expansion, digital growth and increased brand awareness is driving sustained brand momentum and keeping Aritzia top of mind. This momentum, along with our proven operating model and healthy balance sheet gives me immense confidence in our long-term goals for the business. As we look to fiscal 2027, we remain steadfast in further advancing our growth levers. First, our real estate strategy has continued to perform exceptionally well. We have yet another exciting pipeline of boutiques in premier locations planned for next fiscal year. Second, we have several digital initiatives that will support continued momentum in our e-commerce channel. These include additional app features and enhancements, further digital marketing optimization and client engagement initiatives. Third, our new boutiques and marketing investments are proven multiyear strategies to help grow brand awareness in the United States. We also plan to keep making strategic investments to fuel our rapid growth. This includes investments in infrastructure, such as technology and the second distribution center in the United States. As always, we will continue with a long-term focus and balance investing for the future with driving profitable growth. In closing, I'd like to thank our people for their unwavering commitment to creativity, excellence and teamwork. Without this dedication, our incredible achievements in 2025 would not have been possible. What's even more impressive is these exceptional results came against the backdrop of significant macroeconomic challenges. Our teams have set the standard for everyday luxury, and I couldn't be more proud. With that, I'll now hand it over to Todd to discuss the details of our financial performance. Todd Ingledew: Thanks, Jennifer, and good afternoon, everyone. In the third quarter of fiscal 2026, we generated record net revenue of over $1 billion. Top line growth in both the United States and Canada was well above our expectations. We also continue to expand our margins, all combining to deliver a 55% increase in adjusted net income per diluted share. Turning to the details of our performance. Third quarter net revenue increased 43% from last year to $1.04 billion. This was above our guidance range of 20% to 24% as trends from the middle of October through the end of the quarter exceeded even our highest expectations. Comparable sales grew 34%, driven by outstanding growth in all channels and across all geographies. Here's what drove this unprecedented performance. First, we saw an exceptional response to our winter product. This was supported by our strong inventory position. Second, we generated accelerated momentum in e-commerce, fueled by the successful launch of our mobile app. Third, our performance was further driven by total retail square footage growth in the high teens. And finally, our increased investments in full funnel marketing generated substantial traffic growth and helped sustain our brand momentum. In the United States, third quarter net revenue increased 54% to $621 million. This was driven by tremendous momentum in our U.S. e-commerce business, powered by traffic growth of nearly 60%. In the U.S., we also benefited from square footage growth of approximately 30%, including a total of 15 highly productive new and repositioned boutiques over the last 12 months. In addition, we delivered outstanding comp growth in our existing boutiques. The consistent momentum we are generating gives us great confidence in our long runway for growth in the U.S. as we bring Aritzia to new markets and strengthen our presence in existing markets. In Canada, net revenue growth increased sequentially for a fourth consecutive quarter, up 29% to $419 million. This was driven by accelerated growth in e-commerce, which was supported by the launch of our mobile app and strong comparable sales growth in our boutiques. Turning to our sales channels. In e-commerce, net revenue increased 58% to $383 million. This tremendous performance was fueled by strong traffic growth driven by exceptional demand for our products, the successful launch of our mobile app, our investments in digital marketing and the halo effect from our new boutique openings. In retail, net revenue increased 35% to $657 million. This was driven by the ongoing strong performance of our new and expanded boutiques as well as outstanding comparable sales growth in our existing boutiques. Importantly, boutique openings continue to be our most predictable driver of top line growth, enhancing brand visibility and supporting client acquisition in both new and existing markets. This top line performance was instrumental in delivering gross profit of $479 million, an increase of 44% compared to the third quarter last year. Gross profit margin expanded 30 basis points to 46% despite 410 basis points of pressure related to tariffs and the elimination of the de minimis. This pressure was more than offset by leverage on fixed costs, improved markdowns and freight tailwinds. SG&A expenses for the quarter were $290 million, leveraging 170 basis points as a percentage of net revenue to 27.9%. The improvement was primarily driven by expense leverage and savings from our Smart Spending initiative. Adjusted EBITDA was $208 million, an increase of 52% compared to the third quarter last year. Adjusted EBITDA margin expanded 120 basis points to 20%. The consistent margin improvement we've now delivered for 7 consecutive quarters underscores our dedicated focus on delivering multiyear margin expansion. Excluding the nonoperational FX impact this year and last, adjusted EBITDA margin expanded 220 basis points. Turning to the balance sheet. Inventory was $508 million at the end of the third quarter, up 10% from last year. Our inventory continues to be well positioned to meet client demand and a key driver of our sales momentum. Our liquidity position is strong with $620 million in cash, no debt and 0 drawn on our $300 million revolving credit facility at the end of the third quarter. With our growing cash balance, we are reviewing our capital allocation strategy with our Board of Directors. In the meantime, we plan to continue to opportunistically repurchase shares under our NCIB. Since the implementation of our NCIB on May 7 and through the end of the third quarter, we repurchased 474,000 shares, returning $41.3 million to shareholders. Turning to our outlook. The strong momentum in our business has continued into the fourth quarter, fueled by another record-breaking holiday season. Given quarter-to-date trends, we expect net revenue in the fourth quarter to be in the range of $1.1 billion to $1.125. This represents an increase of 23% to 26%, driven by double-digit comparable sales growth and the contribution from our boutique openings. We expect gross profit margin in the fourth quarter to be approximately flat to up 50 basis points compared to the fourth quarter of fiscal 2025 as ongoing leverage on our fixed costs and lower markdowns are offset by approximately 400 basis points of pressure from tariffs and the elimination of the de minimis exemption. We forecast SG&A as a percentage of net revenue to be approximately flat to down 50 basis points compared to the fourth quarter last year as expense leverage and savings from our smart spending initiatives are offset by strategic investments in digital and technology to fuel our growth. Given our year-to-date performance and improved outlook for the fourth quarter, we are raising our net revenue forecast for the full fiscal year to the range of $3.615 billion to $3.64 billion, representing growth of 32% to 33% from last year. We are also increasing our outlook for adjusted EBITDA as a percentage of net revenue to the range of 16.5% to 17% for fiscal 2026. The strength we've generated in our business and our mitigation strategies are more than offsetting the 280 basis points of additional tariff and de minimis pressure this year. Importantly, excluding this pressure, our adjusted EBITDA margin for fiscal 2026 would be above our previous long-term target of 19%. We are extremely pleased with the sustained momentum in our business, particularly as we've begun to cycle the extremely strong revenue growth starting in November of last year. This puts us well on track to achieve our fiscal 2027 revenue target 1 year early. Our proven operating model, healthy balance sheet and long runway for growth in the United States gives us confidence in our ability to sustain strong momentum in our business. We are executing at a high level, and we continue to make strategic investments to fuel our growth. This leaves us well positioned to create long-term value for our shareholders. Thank you. Jennifer Wong: With that, operator, let's please open up the line for questions. Operator: [Operator Instructions] The first question comes from Irene Nattel with RBC Capital Markets. Irene Nattel: And congratulations on another exceptional quarter. As you noted in your commentary, boutique openings continue to be the most visible driver of growth. And you mentioned a few times the long-term sustainable runway. And I'm wondering whether we should be thinking that at this point, maybe you might be accelerating the number of new store openings as we look ahead. Jennifer Wong: Irene, thank you for your question. We certainly did have a tremendous quarter, and we have talked about the market potential in the past, particularly in the United States, where we have just 72 boutiques right now, I have mentioned that we see a long-term opportunity of anywhere from 180 to 200, possibly north of 200 boutiques in the U.S. And our focus continues to attract to be on attracting new clients and engaging our existing clients. And so right now, we're talking about opening a minimum of 12 to 14 boutiques in this year and in the next year. And as we look forward, we think that this cadence probably makes sense for us. That also includes a number of repositions, 4 to 5 repositions. And at this time, this is the cadence of store openings and repositions that we're looking at. Operator: The next question comes from Luke Hannan with Canaccord Genuity. Luke Hannan: I wanted to ask about the app. More specifically, how successful was the launch of the app and the promotion for the 20% off on the initial order? How successful was this in driving new clientele, both online and in-store. Jennifer Wong: Thanks for your question. The app launch was phenomenal. In 2 words, I'd say it was wildly successful. In my prepared remarks, I talked about downloads of over $1 million to date is at 1.4 million downloads. In the first day that we launched, we were the #1 app in the entire app store in both countries. I think we were the #1 shopping app in Canada for 18 days. we were beating out ChatGPT there for a number of days, particularly in Canada. So I mean, the app launch was beyond our wildest expectations. And we couldn't be more pleased at the results, I'm so proud of the team. Operator: The next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: I just had a couple of questions. One, on the complexion of the comp, could you just talk a little bit about the traffic versus ticket and maybe how that's trended so far throughout the year? And any color on what that's looked like quarter-to-date? And then the second one is just a follow-up for Todd. On the second DC that you're opening, are there any considerations about what that cost might look like from a margin perspective or the fact that you're comping so strongly? does it just basically get netted out? I'm curious if you could provide any color there. Jennifer Wong: So on traffic -- Corey, on traffic, we said in our prepared remarks that our business, our top line and our comps, in particular, are primarily driven by traffic. We are seeing a huge change in terms of any other indicators like ticket price or basket size. I would say our business is primarily driven by traffic. Todd Ingledew: Great. And on the new distribution center in Vancouver, which I assume is the one you're referring to, not the potential second DC in the United States. For next year, obviously, we will have incremental rent. As that DC ramps, we do expect to have savings from it, but not at the beginning. And we are still planning for increased margin or margin expansion next year, and we look forward to providing guidance in May as it relates to the distribution center and the rest of our line items. But we do anticipate margin expansion next year despite the DC starting up. Corey Tarlowe: Great. And is there any color on maybe any category specifically or anything you can provide there? That resonated really well in the quarter and then maybe quarter-to-date as well where you've seen some nice traction. Jennifer Wong: Yes. There's nothing really that we can speak of in terms of category. The demand for product was broad-based across all of our assortment. And everything -- when our business is -- we've said this before, when our business is good, and we're delivering 43% top line increase, I mean there's a lot of things working really well. And certainly, our product assortment is just fantastic. I love what I see when I walk into the stores and when I'm scrolling online. I think our product looks absolutely fantastic. And what's even more is that we are in and have been in an excellent inventory position to meet the demand. So everything is working. Operator: Next question comes from Brian Morrison with TD Cowen. Brian Morrison: I want to go back to the mobile app. Can you just talk about perhaps what the penetration rate as a percentage of e-commerce was, maybe elaborate, Jen, on you talked about additional initiatives or new features that are forthcoming. And does the initial reception make you feel in time it could represent 40% of e-commerce sales? Is that realistic? And then just as a follow-up, your international website, can you just comment on where you're seeing the greatest traction with respect to regions? Jennifer Wong: Yes, all really good questions. Thanks, Brian. It's still very, very early days for us with the app. We just launched it. It's really only been up and running for a couple of months now. And I have also said that it's going to take us a few quarters to really see where the app nets out. What we're seeing with our best-in-class peer set is that the app makes up anywhere from 20% to 40% of their overall e-commerce business. I would say we are on track to be in that best-in-class category for sure. And so I'm very encouraged to see these early results. But as I said, it's probably too early to tell. I do anticipate that a portion of that will be incremental lift to our e-commerce business. And so only time will tell. And certainly, as it relates to the new features that you're asking about? I suppose a byproduct of our success is that everyone is watching us. So keeping in mind the competitive factors, I can share probably in very broad strokes what we we're leaning into. Certainly, the digital styling is something that keeps our customer returning to the app will produce more content, more interesting content, unique content and storytelling for the app. Of course, there will always be smaller optimizations to reduce the friction in the shopping journey, looking to integrate the app with the boutique experiences in store for a truly omni experience. So things of this nature. We've got a really robust road map that the team has put together. And again, super excited for future releases of the app and upgrades. And so just, again, couldn't be more thrilled with the performance of the app so far. As it relates to international, continue -- it's almost -- I mean that was a big piece of news, too, and Todd and I were actually kind of joking that after the app news, it's almost like a secondary thought, but still a really important aspect of our overall digital business. We're already seeing higher revenue growth driven by increased conversion on the international e-com site. I realize that it's only just over 1% of our current e-commerce business, but we've stated that we see that tripling in 2 years, and we are, again, well on track to see that. And so right now, I don't know if we're sharing what the top 5 areas of the world are, but certainly, I guess I'll say in no particular order, English-speaking countries like the U.K. and Australia, which isn't a surprise. Certainly, we have interest in Central Europe, like Switzerland and Germany. And certainly, Asia, like China is a very big market for many people. And so you would expect that to be a good response there, too. What I'd say the good news is that we're getting lots of good information for future expansion of the Aritzia brand. Operator: The next question comes from Jon Keypour with Goldman Sachs. Jonathan Keypour: So I was wondering, given the momentum you guys are seeing and the seeming synergies in the word of mouth and the awareness around the brand. Are you finding any flexibility in the previously stated target of low single-digit marketing as a percent of sales? Jennifer Wong: Yes. Marketing has certainly amplified our brand and created a building greater affinity for our brand. I think it's been a huge add in the last year, 1.5 years to our overall playbook. And what we see with marketing is increasing the marketing spend in line with sales. So it will grow commensurate with our overall top line sales and remain a low single-digit percentage of sales. Jonathan Keypour: Great. If I could get a follow-up. Just curious about the progression of the sales momentum from the pre-Black Friday period to the off-sale period between Cyber Monday and Boxing Week, so like the 2 periods of nondiscounting. Just what the momentum between those 2 periods look like? Jennifer Wong: I mean as both Todd and I say, we're absolutely thrilled with the momentum going from Q3 into Q4, effectively, we -- the momentum has been tremendous. We have -- it's -- and what do I say, we've had a phenomenal season. We've had a phenomenal last quarter, couldn't be more thrilled with what's happening going into Q4. We remind you we're lapping extremely robust growth last year in Q4, and we just really see our business firing on all cylinders. Operator: The next question comes from Mark Petrie with CIBC. Mark Petrie: And I'll echo my congratulations on the stellar results. Two areas of follow-up, I guess. first, just on the app integration or introduction, where would you say that put you in terms of e-commerce 2.0? Like how far are you in terms of, I guess, execution? And then how far along do you think you are in terms of seeing the payoff from that with consumers? Jennifer Wong: Yes. We -- about 2 years ago, we embarked on e-commerce 2.0, and we had a real concerted effort and intention to accelerate our digital and omni business, with the build-out of the team and leadership there. I think we're probably 1/3 to approaching halfway through. I think we've built a lot of good fundamentals, a lot of good base infrastructure. We re-platformed our technology stack. We've restructured the team and our ways of working a little bit. We've now hit a couple of milestones with the international e-commerce side with the app. There's still a lot of runway to go and still a lot of really exciting things for us to do. And I think with it continuing to be about 1/3 of our business, while our retail business is absolutely taken off as well. I think back when we were talking about e-commerce 2.0, the retail -- we had been projecting the retail business at a certain clip. And the retail business has actually outperformed what we originally thought then, too. So considering that our penetration has stayed the same and continues to keep up with the retail base continuing to grow at the clip that it's growing. I think overall, our business in both channels is doing phenomenal. And certainly accelerating digital and the omni-experience is a big part of that. Operator: The next question comes from Joe Civello with Truist. Joseph Civello: I just wanted to ask, were there any transitory costs associated with kind of logistical process shifts due to de minimis exemption change. And then secondly, as we build through next year, can we just talk more about some of your IMU initiatives and what inning you're in there, especially as scale continues to grow so rapidly? Todd Ingledew: Yes. Thanks. 100%, there were costs in Q3 embedded related to the de minimis removal and the shift of all of our fulfillment in the United States. That makes up a portion of the 410 basis points of pressure that we experienced from the tariff and the removal of the de minimis with about 2/3 of the pressure coming from the tariffs and 1/3 coming from the removal of the de minimis. Of note, obviously, we are extremely pleased that we still leveraged 30 basis points for really a total increase of 440 basis points ex the tariff and de minimis in the quarter. So pleased with that. And there was some benefit from IMU improvement in Q3. But as we look forward, we are continuing that multiyear IMU improvement and do anticipate that it will be part of the driver of what helps us improve our margins again next year. Operator: The next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: First, maybe could you talk a little bit more about the brand awareness component. You mentioned that as one of your levers. How has that progressed in the U.S.? How does that look relative to Canada? And then quick follow-up on the Q4 guidance. Is it fair to assume on sales that, that implies around like a mid-teens comp for the quarter? And what is that -- like what is the comp looking quarter-to-date? Jennifer Wong: Thanks, Mauricio. I'll take the first part of the question on our brand momentum. I mean experiencing amazing brand momentum, particularly in the last 1.5 years when we increased our marketing efforts and our strategic investments in marketing and that, coupled with the boutique openings themselves and the flagships are opening. So I think it's not any one thing. It's many things all coming together and certainly the marketing is amplifying all of the amazing things that we're doing in the business to elevate our brand and to really ensure that everyday luxury comes to life in everything that we do in every touch point with the client. And certainly, I think our business itself is showing the results of the increased brand awareness in the U.S. and not just awareness but actual affinity for the brand and love for the brand. In Canada, we're very well known and loved and that our goal was to achieve that same level in the U.S. And I think we are well on our way. And certainly, our results with the 43% top line increase, a $1 billion quarter shows that. Todd Ingledew: Great. And I'll take the comp portion of the question. In the fourth quarter, our guidance assumes comp in the high teens, which delivers the 23% to 26% revenue growth. And we are trending slightly ahead of that today. Mauricio Serna Vega: Got it. Just a very quick follow-up on that. So I guess like if I think about your commentary that you said 2-year stacks accelerated throughout Q3. That means like that acceleration has continued into December and quarter-to-date just based on this guidance and what you -- yes, what you're expecting in the comp? Todd Ingledew: Yes. Yes, 100%. It's accelerated slightly. Obviously, we're lapping 26% comp in Q4 last year. So we've got 43% to 46% approximately from a comp -- a 2-year stacked comp that we have embedded in our guidance. And we're extremely pleased with what we're seeing in the fourth quarter. And we were obviously a number of months ago, seeing great momentum in our business and knowing that we had November and the acceleration that we saw in November coming up. And obviously, we've just moved right through that and continue to see the extremely strong momentum in the business. Operator: The next question comes from Chris Li with Desjardins. Christopher Li: Congrats on the strong results. My first question is, I know that over the last couple of years, you have done a lot of work to make the inventory more productive and efficient. Are you pretty much where you need to be now? Or is there room for further optimization that will allow you to really capitalize on the strong product demand and drive further margin improvement? Jennifer Wong: Thanks for your question, Chris. We have done a lot of work in terms of how we approach our inventory. And I would say the team has done tremendous work and has taken things to the next level in terms of how they're looking at our inventory and the level of sophistication with our inventory management is just phenomenal. So I would say nothing is ever perfect around here. I mean I think that's one of the things that drives us is we're striving for perfection and we're -- we have this culture of continuous improvement and always refining right down to the last minute and finding detail of what we can be better. So we're always going to be honing our craft here and always getting better, and we always do get better. But certainly, as it relates to inventory, I would say that is a huge driver, one of the many things that we're doing very well, but it's a huge driver to these fantastic results. Certainly, we have had the inventory to meet the demand and the increase in demand that we've experienced, particularly in the last year. And again, I couldn't be more pleased with what the team has done in order to make sure that we are in that position and continue to be in that position. Christopher Li: That's very helpful. And if I may squeeze in just a follow-up. Just in terms of the comps guidance for Q4, the high teens would imply north of 45% 2-year stack. I know you guys haven't given guidance for next year. But as you start really lapping really strong comps, it's sort of that 2-year stack reasonable to expect for next year, given really the strong momentum that you guys are continuing to see? Jennifer Wong: Yes. I like your enthusiasm for what's going on here for us. I mean we're just as enthusiastic about 2027 as well, although we're not providing any guidance on this call today for 2027. What I will say is we are thrilled with the momentum. We do have to keep in mind the 2-year stack. That said, we are super well set up to succeed and have a strong year with all the elements in place to deliver in 2027 like we have in so far in 2026. And we're going to stick to our strategy and stick to our playbook and because that's proven that that's delivered, whether it be having the right product in the right place at the right time, increasing our square footage growth with the 12 to 14 boutique openings and additional repositions. We got those digital initiatives on the go. and certainly, the strategic investments in marketing that help create more demand and drive even more traffic. So all of those things remain in place, and it gives me tremendous confidence for what we have ahead. I've been with the company now for a very long time. I'm coming up on 39 years, and I've never been more excited about the business as I am right now. Operator: The next question comes from Ike Boruchow with Wells Fargo. Irwin Boruchow: Let me add my congrats. I guess 2 questions from me, maybe for Todd. I guess, I know you're not going to comment specifically on guidance for next year, but last quarter, you kind of took the 19% off the table and just went a little bit lower to high teens given the tariffs that you've meaningfully outperformed in Q3 and your implied 4Q just went up by a lot. So I mean, are you comfortable putting the 19% back on the table just because of the upside you've kind of generated this quarter and what's coming up in the fourth quarter? And then a quick follow-up to that is it's a product of your own success. You guys are going to be lapping something like 25% plus comps annually next year. You go back a couple of years ago, you guys also had a phenomenal year, and you had a little bit of trouble lapping those tough compares. It doesn't seem like that's happening at all here. But are there learnings from fiscal '24 that you kind of apply to kind of make sure that doesn't happen again? I'm just kind of curious how you can compare and contrast what's coming up in '27 versus kind of what happened back in '24? Todd Ingledew: I'll take the first question. So first off, no, we would not put the 19% back on the table at this point. And I think we're most comfortable with that high teens. We do plan to have further margin expansion next year. But I think we're more comfortable with the high teens than leaving the 19% or putting the 19% back on the table. But we look forward to providing guidance again in May. Jennifer Wong: And the second part of your question, which is kind of a broad question. My response to that is it comes down to execution. And what we're experiencing right now is an example of as close to impeccable execution as you can get. And I think we've always prided ourselves on executing in the business. And when we're executing in all areas of the business is when we see these exceptional results. So what I would say to your question is, right now, I find it immensely gratifying to see how our strategy, which has not changed and the focus of the last 3 years is coming to fruition and delivering on these results. And I think if we stick to that and continue to do what we're doing, we will see consistency in our growth and in delivering results. Operator: The next question comes from Navin Nuchem with BMO Capital Markets. Unknown Analyst: Nevin on for Steve today. I'm hoping you can provide an update on your sourcing exposure by company -- or sorry, country rather and just confirm whether you're on track for the mid-single-digit percentage or less from China by spring '26. Todd Ingledew: Yes, we're on track. That's one of the things that we're extremely pleased with what we've accomplished over the last 12 months. The team has done a remarkable job. Sitting here this time last year, we were receiving our spring inventory and approximately 30% to 35% of that was being sourced from China. And today, we are in the mid-single-digit country of origin from China. And so it's actually remarkable what the teams have done over that 12-month period. We are more weighted now to Vietnam and Cambodia as well as a number of other countries. But I think over time, the next phase of our sourcing initiative is to balance more evenly and try to get to a position where maybe we have no more than 20% to 25% sourced from any given country. Operator: The next question comes from Michael Glen with Raymond James. Michael Glen: Just 1 question for me. The 1.4 million downloads that you spoke about, Jennifer. How do we think about that in terms of a penetration rate across your overall customer base? And how does that penetration rate compare against what you see with peers. Thank you. Jennifer Wong: Yes. Great question. Obviously, the response to our app has been tremendous. And I think our clients have been very quick to recognize the value that the app offers and hence, the number of downloads. And so the majority of the customers downloading the app are our existing customers. They are a highly engaged customer. The great news is that there is a good portion of those downloads that are new customers. And what I find particularly encouraging is that we even have a few reactivated customers, customers who haven't shopped with us in quite some time. And because of the app that they renewed their relationship with us. So I think on all different points, the app is providing us tremendous benefit and certainly is allowing us to engage with a customer even more deeply. Michael Glen: And I know you're unlikely to give me a number, but is 1.4 million, how do we think about where that number could eventually get to over time? Jennifer Wong: As I said earlier in this call, it's too early to tell and you're absolutely correct, I am unlikely to tell you that number. But really, it's very early to tell. And certainly, there was a lot of marketing support around the launch of the app. So we came out with fantastic success. And we'll share more as we know more as the quarters progress. Operator: The last question comes from Martin Landry with Stifel. Martin Landry: Congrats on your results. Maybe just a quick one for me on fiscal '27. You've talked about 4 -- 12 to 14 boutiques opening and 4 to 5 relocations. What does that mean in terms of square footage growth? Todd Ingledew: Overall total square footage growth, it would be in the low teens. Martin Landry: low teens. Perfect. Okay. Thank you so much, and congrats again. Operator: This concludes the question-and-answer session and today's conference call. Thank you for joining, and have a pleasant day. You may now disconnect your lines.
Operator: Greetings, and welcome to the Citi Trends Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Nitza McKee, Senior Associate at ICR. Please go ahead, Nitza. Nitza McKee: Thank you, and good morning, everyone. Thank you for joining us on Citi Trends' Third Quarter 2025 Earnings Call. On our call today is Chief Executive Officer, Ken Seipel; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer you to the company's most recent report on Form 10-K and other subsequent filings within the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, Ken Seipel. Ken? Kenneth Seipel: Thank you, Nitza. Well, good morning, everyone, and thank you for joining us today for our third quarter earnings call. I am pleased to report another quarter of consistent performance, demonstrating disciplined execution and progress across every area of our business. Our transformation strategy is gaining significant momentum, our operational capabilities are advancing and our customer connection is strengthening. As I shared at a recent investor conference, we're in the early stages of what I believe will be a compelling transformation for Citi Trends. We've established a clear line of sight to achieve approximately $45 million of EBITDA in 2027, which represents a $60 million increase from the 2024 levels. The substantial growth trajectory will be driven by our continued focus on consistent comparable store sales performance, gross margin expansion, operating expense leverage and strategic new store expansion. Today, I'll walk you through the drivers of our third quarter results and provide additional details on how we're executing against this exciting long-range road map. Turning now to our results. In the third quarter, we delivered comparable store sales growth of 10.8%, which represents a 16.5% growth on a 2-year basis. This marks our fifth consecutive quarter and 15th straight month of strong comp growth with total sales up 10.1% as compared to last year in the quarter. Consistent with our year-to-date performance, the majority of our Q3 sales results were due to increased customer traffic. We began the quarter with a strong back-to-school season, and we finished the quarter with an equally strong late fall fashion and pre-holiday product performance with particular strength in Children's, Men's and basic apparel categories throughout the entire quarter. Our Q3 performance brings our year-to-date comp to a 10% or plus 12.3% on a 2-year basis. We're seeing positive sales increases across all store volume groups and geographies as well as across all product categories, underscoring the breadth of the top line improvement across the business. Plus, I am pleased to report that our holiday is off to a good start, and our strong 2-year stack sales momentum has accelerated into the fourth quarter where we are poised to generate our sixth consecutive quarter of year-over-year growth. Gross margin rate in Q3 was consistent with the operating plan expectations and year-to-date 2025 performance. Our merchants have done a nice job of managing product cost while delivering amazing prices in the ever-changing landscape of tariffs. Due to the macro disruptions, the off-price deal flow continues to be robust, which allows us to have confidence in continued margin performance in the foreseeable future. I should also note that we made a tactical decision to pull forward some of the product originally expected in early Q4 into late Q3, which created a purposeful shift of freight expense from Q4 to Q3 this year. And as noted in our press release, the prior year gross margin rate results in Q3 2024 were artificially high last year due to Q2 strategic inventory reset activity, actions that ultimately jump-started the company's top line turnaround last year. SG&A leveraged 130 basis points compared to last year, which includes the incremental funding of performance bonus program for our employees this year. We're making good strides in improving execution consistency in all areas of the business, which, in turn, is having a positive impact on expense control. Looking ahead, we're focused on efficient execution to enable us to continue to leverage expenses as we grow the top line. As a result, we achieved better than planned EBITDA in the quarter, giving us confidence in raising our EBITDA guidance for the year. Now turning to customer dynamics. Our turnaround is rooted in a clear, unwavering focus on the needs of our African-American customer, who is at the center of everything we do. As I mentioned on prior calls, I believe the primary reason for the quick turnaround in our business is our laser focus on the needs of our African-American customer and our highly differentiated competitive advantage of neighborhood-based locations. Our stores are embedded in communities that we've served for years in proximity combined with word-of-mouth serve as powerful traffic drivers. Citi Trends has built a truly differentiated competitive position in this high-performing off-price retail sector. We're really the only off-price retailer specifically focused on the African-American consumer, delivering styles, brands and trends at compelling prices that resonate with this underserved demographic. Our cultural relevance is a significant competitive advantage, African-American consumers are trendsetters and early adopters, and understanding this dynamic allows us to carry assortments with immediate appeal to our core customers. We also know that our customers are discerning. They understand that value is not just about price. They're willing to spend more when the style is for them, the fashion is on trend and the quality is right. Our consistent strong traffic and basket performance in the third quarter provides clear evidence, demonstrating the strength of our uniquely loyal, high-frequency customer base. We continue to strengthen this connection by elevating cultural relevance of our assortments and refreshing the shopping experience to better align with our brand voice. Our brand promise says it all: Styles that see you, prices that amaze you, and trends that tell your story. This holiday, we are launching and have launched the rebranded Citi Trends "Joy Looks Good on You" holiday campaign with updated social media presence under the @wearecititrends tagline. We've also implemented city bus wraps and shelter marketing in key markets to strengthen our local presence. All of this reflects a more refined, culturally relevant, modern brand voice. Looking forward to further enhance our customer relationships and drive deeper engagement, we're making strategic investments in our technology infrastructure, including the design and implementation of a new CRM and loyalty platform. This work will deepen our interaction with our most frequent customers and enhance long-term customer value. While we're in the early stages of this initiative, we're excited about the opportunity to create a more meaningful brand interaction with our best and most loyal consumers. Before diving into this quarter's product performance, let me briefly remind you of our 3-tiered product strategy. What's important to understand is that we're serving customers across all income levels and we have a significant portion of average and higher-income customers, which creates tremendous opportunity for our assortment of recognizable brands at exceptional prices that align with their style and trend preferences. At the opening price point, we offer value-focused basics through our Citi $core program for budget-conscious customers. The core of our business is our better tier, typically priced between $7 and $12, which offers broad selection of on-trend styles that drive loyalty and consistent performance across Women's, Men's, Kids, footwear and home categories. At the top end, we're expanding our best tier through 2 distinct approaches. First, trend-relevant fashionable styles priced well below specialty retail; and second, extreme value opportunities featuring well-known brands at steep discounts, often up to 75% off MSRP. We're targeting this extreme value segment to represent an incremental 10% of total sales as these branded treasures drive both traffic and basket growth while delivering strong margins. With this strategic framework in mind, now let me walk you through our Q3 product performance, which is broad-based and balanced in all categories. Strong results were driven by both apparel and nonapparel categories and all divisions posted increases. But first, I'd like to congratulate our Children's team on their strong double-digit growth in back-to-school and throughout the quarter. As our Children's team continues to improve style curation and product in-stocks, our customers continue to respond positively. Children's is a cornerstone of our business and a model of consistent execution this year. Equally, basic product for Kids, Men's and Women's had a strong quarter, driven by better styles and improved inventory position in store. Our Men's division had another strong quarter of growth, reflecting the team's work to increase trend for our younger male customer while also attending to the fashion sensibilities of our mature male consumer. We're excited about this more comprehensive approach to our male customer. And based on the positive initial customer reaction, we have significant growth ahead in this particular category. We also saw momentum in Women's footwear, which is an area we've been working to regain lost market share. There's still more work to be done in this category, but we're encouraged with Q3 results and customers' response to our branded product at extreme values. Looking ahead in product, we're focusing on strengthening our product offering in all categories. Our Creative Director has significantly raised the bar and is focused on curating trends to ensure our product is always trend right. From the opening price product to our best branded fashions, our merchant team is finding ways to elevate trends and styles at amazing prices. In Q4, we're repositioning the Men's store presentation to highlight increased emphasis on young Men's trend apparel while maintaining our core and classic portions of the assortment. We're in the early stages of repositioning our Women's area to better reflect the style, trend and sizing opportunity that we see for the business and plan to introduce an improved assortment to our customers in Q1 of next year. As I've mentioned before, we're continuing our focus on growing our anticipation classifications, which includes Big Men's, plus sizes and family footwear, all of which have significant upside potential in the future. Turning now to operations. As I've discussed in the past, our transformation is guided by a 3-phase framework designed to deliver sustainable, profitable growth. In the repair phase, we focused on restoring fundamental business practices to ensure a strong foundation for growth, including sharper clarity around our African-American consumer, our 3-tiered product assortment and implementation of AI-based allocation software to improve in-stocks, reduce markdowns and accelerate inventory turns. We are now firmly in the execute phase, focused on implementing best practices across all areas of the business to improve productivity and enable SG&A leverage. This includes increasing supply chain speed, reducing working capital costs and aligning our teams around KPIs and performance linked compensation to drive continuous improvement. From an operational standpoint, we made continued progress on these phased initiatives in the third quarter. I want to congratulate the entire team, specifically our senior leaders for improved business execution in Q3. One of the keys to our success was consistent execution of a detailed plan to emphasize tactical excellence to win the quarter. We continue to improve our inventory efficiency, supporting a 10.8% comp with overall 3% less inventory than the prior year. Due to speed improvements in our supply chain, we are also able to execute a 4.5% higher average in-store inventory. In the supply chain, improved work processes, productivity standards and day-to-day leadership enables us to efficiently reduce in-process inventory. This improved efficiency drives working capital optimization and provides flexibility and speed to react to sales trends while protecting gross margin. In the quarter, we finalized the implementation of our AI-based allocation system across all merchandise categories, and we remain pleased with the results. We're now turning our attention to an AI-based planning system to help streamline sales and inventory planning processes for our merchant teams. As I said before, retail is detail, and execution without measurement is just guesswork. Our use of KPIs and dashboards across all key functions provides the visibility that helps our teams stay on track and drive continual operational improvement, which is the core element of our execute phase strategy. Looking ahead, while we've made good operational progress. As I said earlier, we recognize a significant opportunity remains to improve execution in many areas of our business. As we advance through our execute phase and improve consistency, we expect continued SG&A leverage to enhance flow through of sales to profit. Now turning to our growth strategy. We remodeled 24 stores in the quarter, including 15 high-volume stores. Year-to-date, we've remodeled 62 locations and now have about 30% of our fleet in an updated format. These refreshed stores inspire our teams, elevate brand perception in the community and send a strong signal that we're investing in local neighborhoods. In the third quarter, we opened 3 new stores in Jacksonville, Florida; Columbia, South Carolina; and Bainbridge, Georgia, bringing our store count to 593 locations across 33 states. In addition, we remodeled 5 stores in Columbia, South Carolina and 4 stores in Jacksonville, Florida. And in support of these new stores and remodels, we added local marketing, which included wrapping city buses with the Citi Trends brand message. These openings are part of our pilot market backfill approach, which we are opening new stores in conjunction with remodeling existing locations to increase market share by strengthening our store presence and reinvigorating our brand. In the first few weeks of business, the new stores and markets have responded above expectations. I look forward to giving you a more thorough update on our next call after we have a full holiday season of results in these markets. These market investment tests will inform our approach as we accelerate growth in 2026, when we plan to open about 25 new stores, followed by at least 40 stores per year in 2027 and onward. This expansion strategy will take our store count to around 650 stores by the end of 2027, focusing on backfilling existing markets where our brand awareness and performance are proven while selectively entering new markets with strong demographic alignment to our customer base. Our positioning of Citi Trends for strategic new store growth is guided by a disciplined data approach. Our new store expansion combines advanced AI-driven analytics, local market expertise and strict financial criteria. Using AI tools, we have analyzed 3 years of actual transaction data from every store location, combined with comprehensive geolocation studies to understand the specific market characteristics that drive our success. This data-driven approach has demonstrated about 90% accuracy in predicting sales, helping us identify and replicate our most successful store profiles while minimizing risk. We're applying disciplined financial hurdles to every new store decision, targeting mature store averages of about $1.5 million and mid-teens 4-wall contribution. Looking ahead, we continue remodeling about 50 stores per year as a part of our ongoing fleet maintenance and market investment strategies. This disciplined approach allows us to progressively upgrade our store base while achieving planned returns on invested capital and positioning us to expand intelligently while -- excuse me, while maximizing return on investment. Longer-term growth in early October, we had a chance to share our multiyear growth plan at an investor conference. The presentation we shared is available on our Investor Relations website. But I do want to take a minute just to review some of the key objectives of our long-range plan. The first objective is to grow sales to $900 million or more in fiscal 2027 with consistent comp store sales growth plus the addition of about 25 new stores in fiscal 2026 and 40 stores in 2027. We plan to achieve a gross profit rate of 42%, a 400 basis point expansion compared to fiscal 2024, and we plan to leverage expenses by 200 basis points to a rate of approximately 37% or less. Resulting EBITDA is expected to be $45 million or more in fiscal 2027, a $60 million improvement to 2024 and an EBITDA margin rate of approximately 5%. These are not distant goals. They're achievable outcomes driven by the actions we are actively executing to drive the turnaround of this important business and with our fiscal 2025 results to date. I think it's fair to say that we're off to a pretty good start. With that, I'd like to turn the call over to Heather to discuss our financial performance for the quarter in more detail and our outlook for the fourth quarter. I'll return after Heather for some closing remarks. Heather? Heather Plutino: Thank you, Ken, and good morning, everyone. I'm pleased to walk you through the details of our third quarter performance, which demonstrates once again the consistency and effectiveness of our transformation strategy. That clear strategy plus the foundational improvements made to date have created remarkable momentum across the business, and we are delivering measurable progress across key operational metrics. Starting with the top line, Q3 total sales were $197.1 million, up 10.1% compared to Q3 2024. Comparable store sales increased 10.8%, 16.5% on a 2-year stack basis. Ken said this already, but it's so good it warrants repeating, our Q3 performance marks our fifth consecutive quarter and 15th straight month of strong comp growth, a remarkable feat, particularly in the current retail environment. We delivered strong comps in each month of the quarter and saw consistent year-over-year growth in both traffic and basket as our revised merchandise assortment, including off-price deals and more branded extreme value product continues to resonate strongly with our customers, enabling us to gain market share. We also saw positive results across all climate zones across all store volume groups and across all product categories, demonstrating the broad-based nature of our improving results. Third quarter gross margin was 38.9%. While 90 basis points lower than Q3 2024, these results were in line with our expectations. Recall that in the second quarter of last year, we incurred significant markdowns from our strategic inventory reset, allowing us to exit aged and slow-moving products while freeing up open-to-buy for our revised product strategy to fuel our top line growth. As a result, markdowns and shrink in Q3 of last year were unnaturally low, creating an unfavorable comparison for the current year period. As Ken mentioned, early in the third quarter, we decided to shift inventory and related freight expense from Q4 into Q3 to better manage freight flow for the distribution centers. Doing so drove additional freight expense in Q3, about a 40 basis point impact to margin rate while accomplishing the smoothing we wanted to achieve, protecting the holiday and delighting our customers with earlier access to holiday goods. Importantly, product margin was consistent with the results from the first half of the year due to the hard work of our merchant teams, as Ken remarked on earlier. Third quarter adjusted SG&A expense totaled $79.5 million compared to $74.6 million in the prior year period. The increase to last year was driven by $3.2 million of higher incentive compensation accrual and store and DC expenses to process higher sales. As we've shared in previous calls, we reinstated an incentive compensation accrual at the beginning of this fiscal year after incurring very minimal related expense in fiscal 2024, causing the bonus to no bonus comparison again in the third quarter. In addition, due to improved expected financial results for the year, we set the bonus accrual to the max payout, driving a catch-up accrual in the third quarter. On a rate basis, Q3 adjusted SG&A was 40.4%, 130 basis points lower than last year. Adjusted EBITDA for the quarter was a loss of $2.9 million, in line with management expectations and better than a loss of $3.3 million a year ago. Before turning to the balance sheet, let me provide a few details on our performance through the first 9 months of fiscal 2025. Comparable store sales for the first 9 months increased 10% with a 2-year comp stack of 12.3%. Comps were driven by a 6% increase in transactions. This is a metric we're most proud of as it is evidence that our loyal customers are responding positively to the changes we've made in our assortment strategy and to the in-store experience. Adjusted 9-month EBITDA was a loss of $0.1 million, an increase of more than $21 million to last year. EBITDA growth was driven by more than $47 million in incremental sales, 290 basis point margin rate expansion and 100 basis points of SG&A leverage, so improvement across the board. Now turning to the balance sheet. Total inventory dollars at quarter end decreased 3.1% compared to last year with average in-store inventory up 4.5% as we strategically positioned ourselves for holiday sales, including the pull forward of inventory receipts from Q4 into Q3. As Ken mentioned, our success in driving double-digit sales increases with a modest increase in in-store inventory reflects our work to improve inventory efficiency through higher turns and improvements in supply chain speed. As we enter the important Q4 holiday selling season, we remain pleased with our inventory level, composition and freshness. At the end of the third quarter, we remained in a healthy financial position with a strong balance sheet, including no debt, no drawings on our $75 million revolver and $51 million in cash. This financial strength continues to give us the flexibility to invest in our growth initiatives while ensuring operational stability throughout our transformation. Now turning to our fiscal 2025 outlook. Based on our results through the third quarter and our confidence that the effectiveness of our turnaround plan will continue through the fourth quarter, we are pleased to update our outlook for 2025 as follows. With sales momentum of the first 9 months of the year continuing into early Q4, we now expect full year comp store sales growth of high single digits at the high end of our previous outlook. We now expect full year gross margin expansion of approximately 230 basis points versus 2024, also at the high end of previous outlook due to continued progress on inventory efficiency and planned supply chain improvements. 2025 SG&A is expected to leverage approximately 90 basis points versus last year, reflecting continued expense control. Once again, this is at the high end of our previous outlook of 60 to 90 basis points leverage versus '24. With these updates, we now expect full year EBITDA to be in the range of $10 million to $12 million, an increase to the $7 million to $11 million range in prior guidance. The revised guidance is $24 million to $26 million above fiscal 2024 results. There is no change to our expected effective tax rate of approximately 0% for the year. For the year, we will open 3 new stores and will remodel 62 locations. Both of these targets have been achieved as of the end of the third quarter. In addition, we are planning to close 4 stores in the fiscal year, just above our previous guidance of 3 closures. And finally, full year capital expenditures are now expected to be approximately $23 million, at the lower end of our previous outlook of $22 million to $25 million. While we don't provide quarterly guidance, given where we are in the fiscal year, we want to offer our thoughts on our expectations for the fourth quarter. Q4 comps are expected to be up high single digits with a 2-year stack in the mid-teens. Q4 gross margin is expected to be in the range of 40% to 41%, up to prior year. SG&A is expected to be approximately $82 million, and Q4 EBITDA is expected to be in the range of $10 million to $12 million. Before I turn the call back to Ken, I want to emphasize that our third quarter results reflect more than just 3 months of strong execution. They demonstrate the durability of our business model, the effectiveness of our strategic initiatives and most importantly, are a continuation of the improvement we've achieved across the last several quarters. As we look towards the fourth quarter and into fiscal 2026, we remain committed to our disciplined approach while maintaining the flexibility that has served us well throughout this transformation. The foundation we've built gives us confidence in our ability to deliver sustainable, profitable growth while continuing to create shareholder value. I'm excited about the opportunities ahead as we continue to execute against our strategic plan. With that, I'll turn the call back to Ken. Ken? Kenneth Seipel: Thank you, Heather. Before I turn the call back to the operator to facilitate Q&A, I do want to emphasize that the transformation of Citi Trends is well underway. We remain guided by our 3-phase framework to deliver -- designed to deliver sustainable profit growth. The first phase, repair, is about restoring fundamentals and establishing a strong foundation for growth. The second phase, execute, focuses on hardening consistent best practices to drive reliable, predictable performance. And the final phase, optimize, leverages the work of the first 2 phases to accelerate our EBITDA growth. As a result of our efforts, in the first 2 phases of this transformation, we've made meaningful improvements, including an improved product assortment strategy, a better in-store stopping in-store shopping experience for our customer and improvements in many processes and systems. Our 5 consecutive quarters of comp store growth is a proof point that our strategy is working, our execution is getting better, and our customer connection is stronger than ever as we firmly establish ourselves as a leading off-price retailer for our customers. While we're proud of our results so far, we fully recognize there is significant opportunity ahead. I want to emphasize that we're in early stages of this transformation. There's still work to do, processes to refine, categories to optimize and systems to build, but the path forward is clear. We are confident in our ability to deliver continued transformation, drive shareholder value and expand our role as the leading neighborhood retailer for African American families. I want to thank the entire Citi Trends team for executing with discipline, driving quickly towards our stated goals and most of all, for delivering results. The team is doing the hard day-to-day work to unlock sustainable growth and shareholder value, and we are just getting started. Thank you, everyone. And now I'd like to turn it over to the operator for questions. Operator: [Operator Instructions] then return to the queue. Our first question is coming from Michael Baker from D.A. Davidson. Michael Baker: Great. Great quarter. So if I think about the 2-year plan to get to about $900 million, it probably implies another $85 million or so in sales growth in '26 and '27. You talked a lot about some merchandising opportunities and categories. But a little bit more detail on where are the biggest holes or opportunities in your merchandising right now, either by product category or buy good, better, best or however you want to articulate, where does that -- those incremental sales come from? Kenneth Seipel: Yes, for sure, Mike. Thanks. We, as I mentioned in the script, we are seeing broad-based growth throughout all the categories. And so at the top level for all categories, we've really sharpened our focus on better trend product. And we have seen good reaction to that this year and continued reaction. I mentioned briefly that we have just implemented a young Men's category, that's actually just setting in the stores right now. We're seeing good reaction to that. And as we begin to understand a little bit more about that dynamic, there's significant opportunity there. Equally across the aisle in our Women's category, we've always had a pretty strong juniors business, but we recognize that there's a missing component of that as well as plus sizes that needs to be fully matured. And then on top of that, overlay trend product and those categories as well. And so that's a little bit of a new business for us relative to those 2 categories getting reset. And then across the fleet. We're just getting -- going in shoes in our footwear category. The team, as I remarked, had a pretty good Q3 in Women's. We're off to a good start there. But we have significant opportunity, multiple millions of dollars of opportunity to grow our shoe business back to even, say, historical levels, let alone to catch up to where we are in the overall store. So there's significant opportunity there. And then I would highlight, and I don't mean to make this so broad based, but it really truly is how we're looking at it. In Kids, for example, as we continue to build that business, it gets stronger and stronger and stronger. We've been executing quite well in Kids. But as we continue to invest in inventory, we see it grow. So there's areas throughout the store that we see that they just offer tremendous opportunities for growth. And then I guess I'll put the punchline for all this. The other piece of it. Don't forget that we have the extreme value opportunity. And we're doing a fairly small percentage of our business and extreme value right now. It's working quite well, and we see significant growth there. All of that actually totals up to, in my mind, a very obtainable $900 million. Michael Baker: Great. If I could ask a follow-up, I suppose, by virtue of the 10.8% comp, your trends are probably consistent throughout the month. You talked about consistency by product category and store cohort. Can you talk about the pace through the quarter? And if there was any impact from the government shutdown, SNAP, anything during those few weeks? Kenneth Seipel: Yes. I'll make some high-level comments, and then Heather can fill in any of the specifics here. But the good news about our consumer right now, they've shown remarkable resiliency with all of the macro changes around government SNAP and different programs like that. And candidly, we've really seen no major impact as the shopping patterns have remained consistent throughout the quarter. As I mentioned, we got off to a really good start in August. August was tremendous for us, led by our Kids division. All divisions did well, but Kids really had a tremendous back-to-school period. And then I was really pleased with how we finished the quarter. October, particularly the last 3 weeks of October really accelerated quite well. I mentioned in the script that we advanced some of our freight from Q4 into Q3. When that hit our stores, we actually saw a really strong consumer reaction. Heather Plutino: Yes. Mike, the only thing I would add to that is that it was a pretty tight band. It looks a little bit like a barbell, stronger in the beginning, first month, third month, middle month was a little softer, but the range is like 9.5% to 12%. So it's not like a severe dip in the middle, or severe spike. So yes, pretty consistent. Operator: Next question today is coming from Jeremy Hamblin from Craig-Hallum. Jeremy Hamblin: Congrats on the impressive results. I wanted to just come back to the point, Ken, that you were making on some of these extreme value deals, which we saw some of those drop towards the end of the quarter, some notable deals with products like UGG, HOKA, Timberland brands, Jordan brand, et cetera. And that did seem to be a big driver of your strong traffic. But where are you in terms of extreme value as kind of a portion of the product inventory and sales today? And I think you mentioned that you're expecting over the next couple of years to get that up to about 10%. How do you expect that to progress over time? And what type of visibility do you have on continuing to drive deal flow across kind of major name brands? Kenneth Seipel: Yes. Good. Thanks, Jeremy. I appreciate it. A couple of things in our current status, extreme value deal flow, as I mentioned, continues to be very robust for the team. And we're being pretty discerning about what's being brought into the business right now. Many -- I guess we probably passed on a 3:1 ratio of adoption of deals that come across the desk, maybe even more. And as a result of that, the current sales performance of extreme value deals is probably in the 2% to 3% of business range, and that I'll just give you a broad range right now. It varies a little bit by category. And back to your point, we've seen a path to getting that closer to 10% as we continue to mature. So there's a significant opportunity there. And we're learning a lot as we're bringing some of these deals in. Many of them have really responded much better than anticipated. If you have been a little bit slower than anticipated, a lot of it has to do with consumer acceptance and reaction of it. But as we're getting better and understanding how to do extreme value deals, particularly with our supply chain processing, we see that, and I believe that remains to be a competitive weapon for us going forward. Jeremy Hamblin: And then switching gears here to talking about the store fleet. And as you are rolling out stores for '26 and seeing a nice uptick in your unit growth, what do you expect the cadence of openings to be in '26? And then you mentioned 2027, is that going to be kind of consistent in terms of store openings now that you've got visibility on the number of units that you're planning to open? Kenneth Seipel: Yes. I'll give you a little bit of color on the process going forward into 2027. Our real estate team right now is working on a number of deals in the pipeline. And our goal will be, going forward, to open up our stores really at 3 distinct times of the year. We'll be opening up stores in early spring, going into the spring period, the [indiscernible] season. We'll be opening up stores in July, going into back-to-school. And we'll open up a group of stores in October going into holiday. And so I would expect that, that fleet going forward, the 40 stores that I mentioned earlier, you can probably divide that equally by 3 into those time frames and probably have a really good view of how we're looking at the business from our side. In 2026, we'll have lighter openings in the spring. We're just getting caught up there. Most of those openings will be more in July and August, probably equally split there -- or excuse me, July and October, equally split between those 2 months, to give you an idea as we get caught up and get this engine moving forward in new store growth. Jeremy Hamblin: Great. And then just one more for me. I know that you've got a lot of initiatives that are going on, a lot of technology initiatives. But I wanted to ask about your shrink mitigation efforts. I know this is something that you've been working on very diligently. And I think you had a pretty decent gap to close of where you wanted to get that, too. But any color you can share on the progress, on those efforts? What the impact is to your gross margin? And what do you expect to pick up from that kind of in 2026? Heather Plutino: Jeremy, I'm going to grab that one. So we've rolled out new camera systems in about 1/3 of our stores in 2025. And these new camera systems not only provide what you would expect visibility into the store, but they're AI-capable and allow for our loss prevention team to use facial recognition, which you can imagine is helpful not only to protect our stores, but to engage with local law enforcement and to help the community, not just our Citi Trends stores. So we're excited about that. Those cameras also have, outside of loss prevention and shrink prevention, they have heat mapping capability, which will help us understand customer shopping patterns and they have traffic counting capability, which obviously is an important component as well. So we're excited about that. We're going to roll out to more than 2x that number of stores into 2026, so that we can leverage that very, very quickly. You and I talked about this before, but our break rate in 2025, it still remains what I understand to be in line with averages for retail. So we're not satisfied yet. And that means that it's less than 1.5% of sales, right? So still higher than we want it to be, less worried about the rate than I am about the dollars. I think we still have a few million to give back to the company on shrink mitigation over time. Now as I look at 2026, our plan assumes a decrease in both dollars and rate in 2026 based on technology, based on talent. We are upgrading and updating our talent in our loss prevention teams. And based on processes, we are training regularly our store management teams and our district managers on shrink mitigation. So all of that comes together to say that we expected a decrease in 2026 and a further decrease in 2027. Jeremy Hamblin: Fantastic. Last one for me. So you also noted the implementation of technology, improving CRM. Can you elaborate at all in terms of how you plan to use that as the company continues to gravitate to using a bit more digital marketing efforts. Are there -- is there a thought around kind of loyalty program that you're leaning into? But any more color you might be able to share on kind of the timing of when the CRM update is happening and what you expect the outcome to be from that? Kenneth Seipel: Yes, for sure, Jeremy. We are in the process, as I mentioned, of really getting it out and testing and developing the systems and the processes that go along with that. Our goal will be to launch a CRM in Q1 of this next year. And we don't have an exact date yet. We're still trying to pin down some stuff on the technology and its readiness and so forth. But think about a Phase 1 implementation in Q1. And then there will be a Phase 2 implementation in the fall of 2026. The way I want you to think about CRM and loyalty for our business is we're actually going to be calling it "The Insider's Club." We'll have a much better title I'm sure by the time we get to it. And it's effectively going to be a way for our customers to tap into emerging trends and deals. You think about the value of being a part of our loyalty club and being one of the first ones to know about some of these amazing extreme value deals that are coming down the pipeline. We have the ability to notify our best customers. They can kind of come in and shop first, invest, and be kind of in the know, if you will, around emerging deals that are coming to the store. We believe that there will be a significant interest in that. And that actually has the ability then to drive incremental traffic with some of our best and most loyal consumers. And beyond that, we're also trying to build in additional tools to make the shopping experience easier for our best customers. As an example, one of the things that they'll gain is actually the ability to have electronic receipts. And so quickly, they can have that stored and be on their phone and eventually we'll have an app on there that they can just simply access that had also a layaway programs and things of that nature will have digital access. So the goal here is to make it in Insider's Club, and then to find ways to make the shopping experience a little bit easier and more convenient for our consumer. And then as you mentioned, the intangible value for us is we're going to have a pretty significant database of consumers that are highly engaged that we can speak to with regularity via these marketing ideas. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for your further closing comments. Kenneth Seipel: I'd like to thank everybody for attending today's call. We look forward to talking to you next quarter. Operator: Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and welcome to the Abercrombie & Fitch's Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions]. Today's conference is being recorded. At this time, I would like to turn the conference over to Mo Gupta. Please go ahead. Mohit Gupta: Thank you. Good morning, and welcome to our third quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer; Scott Lipesky, Chief Operating Officer; and Robert Ball, Chief Financial Officer. Earlier this morning, we issued our third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mentioned today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and in the investor presentation issued earlier this morning. With that, I will turn the call over to Fran. Fran Horowitz-Bonadies: Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our 12th consecutive quarter of growth, with sales up 7% to a record of $1.3 billion. We again delivered on the goals we outlined for the quarter, with net sales and operating margin, both at the high end of our outlook, earnings per share above our expectations and inventory levels aligned with trend. Along with these strong financial results, we repurchased $100 million worth of shares in the quarter, bringing our total to $350 million, or 9% of shares outstanding as of the beginning of the year. Our team continues to stay close to our customers while reading and reacting to the current environment. In the quarter, we made further progress on key brand, regional and foundational investments. Based on our third quarter momentum and our fourth quarter outlook, we are narrowing our full year sales outlook towards the top end of the range we provided in August, targeting a strong finish to 2025 on top of a record 2024. Financially, in addition to record net sales, we delivered a gross margin of 62.5% and a 12% operating margin for the quarter, both of which include an adverse tariff impact of around 210 basis points. We exceeded our outlook range on earnings per share, delivering $2.36 for the third quarter. On the regions, we saw continued growth in the Americas with net sales up 7% on balanced traffic gains across channels. In EMEA, total sales increased 7% with comparable sales higher by 2%. Similar to last quarter, strong sales performance in the U.K., our largest country in the region, continued to be fueled by localized marketing, inventory distortions and strategic partnerships. Strength in the U.K. was partially offset by softness in Germany and the remainder of European markets. In APAC, net sales were down 6% with comparable sales down 12%. Across regions, we remain excited about the significant long-term global growth opportunity for our brands through a blend of go-to-market strategies, including owned and operated, franchised, wholesale and licensing. Turning to the brands. In line with our expectations, we made sequential improvement in Abercrombie brands that sales were down 2% and comparable sales down 7%. We continue to see positive cross-channel traffic to the brand and we managed inventory tightly, enabling improved AUR trends compared to the first half. The sequential improvement was led by Women's, where we had a good seasonal transition to cold weather categories across top, bottoms and outerwear. In Abercrombie, we continue to remain active in marketing, building on early fall denim and NFL campaigns with our recently announced collaboration with luxury retailer Kemo Sabe. Putting these 2 brands together with a great way to connect with new and existing customers offering authentically crafted leather apparel and accessories, highlighting the Western trend. Abercrombie has inventory in the right place and a strong marketing plan heading into holiday. We've opened 30 new stores in the third quarter, aiming for a total of 36 this year. We remain focused on bringing the brand back to growth by diligently executing the playbook that has delivered a double-digit CAGR on sales from 2019 on strong double-digit AUR improvement over that time. This holiday, you'll see a lot of Abercrombie is known for, fashion, comfort and authenticity, and you'll continue to see it expressed through newness across categories. With this combination of investment across product, voice and experience, we are aiming for Abercrombie brands to be approximately flat in the fourth quarter on net sales against a record in Q4 last year. We're excited to see that milestone within reach. In Hollister, we saw exceptional growth trends continue with 16% net sales growth in the third quarter. Comparable sales were up 15% on continued strong cross-channel traffic. Both Men's and Women's contributed to growth in the quarter, and we saw balance across categories. Consistent with our Read & React model, we've been keeping inventory tight while continuing to flow in newness allowing for AUR improvement on lower promotions. Coming off a very strong back-to-school season, I was proud of the team transition to fall and into holiday. Speaking of holidays, Hollister has some exciting campaigns and collaborations planned that will highlight some must-have for the season. We kicked off a couple of weeks ago with 6 college athletes co-designing special items in our Collegiate collection for football rivalry week. And you might have seen yesterday's announcement with Taco Bell with the brands collaborated on 90s and Y2K styles across graphics and fleece. We are just getting started. And importantly, our team has been reading and reacting and has the right product to support sales throughout the season. We're also enhancing the Hollister brand with investments in physical retail. We are on track to open 25 new stores this year while refreshing more than 35. The theme across our brand portfolio and company is consistent. We remain on offense. From both a brand and regional perspective, we are investing in marketing, stores and talent to support sustainable long-term growth. We also continue to make opportunistic investments in digital, technology and our infrastructure to improve the agility and speed needed to support our growing global business. These tech investments have the power to enhance the entire customer journey, especially when paired with AI. We recently deployed AI agents and customer service to improve the experience while driving scale and efficiency. And we're very excited about a new partnership we're kicking off this week with PayPal and SymBio, one of our technology partners in marketplace sales, that will enable agentic commerce and AI answer engines like Perplexity, where customers can seamlessly complete transactions directly within their AI conversation without even leaving the chat. As our business continues to evolve, we're making future focused investments to deliver for customers and strengthen our operating model. And for us, that's really the story of 2025. More than 3 quarters in, I am proud of how the team has worked through this year, responding to the dynamic tariff environment and evolving with our customers. We are fully prepared for the holiday season having used these past months and quarters to test and learn and build confidence in our assortment and brand positioning. We've also continued to keep inventory tight with the goal of reducing promotions and clearance selling to mitigate some portion of the tariff cost. With our holiday plans in place, we expect to deliver top-tier profitability and earnings per share, reflecting the consistency of our model. And with that, I'll hand it over to Robert. Robert Ball: Thanks, Fran, and good morning, everyone. Recapping Q3, we delivered record net sales of $1.3 billion, up 7% to last year on a reported basis at the high end of the range we provided in August. Comparable sales for the quarter were up 3%, and we saw a benefit of approximately 50 basis points from foreign currency. By region, net sales increased 7% in the Americas, 7% in EMEA, partially offset by a 6% decline in APAC. On a comparable sales basis, Americas was up 4%, EMEA was up 2% and APAC was down 12%. Across regions, the spread from net sales to comparable sales was driven by net new store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. On the brands, Abercrombie Brands net sales declined 2% with comparable sales down 7%. Consistent with our third quarter outlook, the sales decline was primarily due to lower AUR, but the AUR decline was less than the first half of the year. Hollister Brands net sales grew 16% on comparable sales growth of 15% with both unit growth and AUR improvement from lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by third-party channel performance, along with net store openings. I'll cover the rest of our results on an adjusted non-GAAP basis. Operating margin of 12% of sales was at the top end of the outlook range we provided in August, delivering operating income of $155 million, compared to $175 (sic) [ $179 ] million last year. Adjusted EBITDA margin for the quarter was 15% of sales on adjusted EBITDA of $194 million compared to $219 million last year. The 280 basis point decline in operating margin from Q3 2024 was driven primarily by 210 basis points of tariff expense included in cost of sales. In addition, as we forecasted in August, third quarter marketing was up 100 basis points from the prior year. This was partially offset by leverage in general and administrative expense on lower payroll and incentive compensation. The tax rate for the quarter was below our outlook at 29% driven by outperformance to expectations in EMEA. Net income per diluted share was above our outlook at $2.36, compared to $2.50 last year. Moving to the balance sheet. We exited the quarter with cash and cash equivalents of $606 million and liquidity of approximately $1.06 billion. We also ended the quarter with marketable securities of approximately $25 million. For the quarter, we repurchased $100 million worth of shares, ending the quarter with $950 million remaining on our current share repurchase authorization. Year-to-date, we repurchased $350 million in shares totaling 9% of shares outstanding at the beginning of the year. We ended the third quarter in a clean current inventory position with costs up 5% and units up around 1% and have seen freight and other unit cost mix normalize. Shifting to the outlook. We entered the fourth quarter with momentum, and we are narrowing to the upper end of the full year sales expectations we provided in August. We continue to reflect tariffs and mitigation consistent with our second quarter call commentary and the team continues to find cost efficiencies through vendor discussions as we plan 2026. For the full year, we now expect net sales growth to be in the range of 6% to 7% from $4.95 billion in 2024. We've narrowed the range to reflect third quarter performance and for expected fourth quarter sales. We currently anticipate 60 basis points of favorable foreign currency in the outlook. We continue to expect full year GAAP operating margin in the range of 13% to 13.5%. As a reminder, this range includes the impact of the $38.6 million benefit from litigation settlement or around 70 basis points of sales. Also, the assumed tariffs included in the operating margin carry a cost impact of around $90 million for 2025, or 170 basis points of sales. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around $48 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10.20 to $10.50. For clarity, the $38.6 million benefit included in our outlook carries a favorable impact of $0.59 per share. For capital allocation, we continue to expect capital expenditures of approximately $225 million. On stores, we continue to expect to deliver around 100 new experiences, including 60 new stores and 40 right sizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we are targeting around $450 million in share repurchases for the year, subject to business performance, share price and market conditions. For the fourth quarter of 2025, we expect net sales to be up 4% to 6% to Q4 2024 level of $1.6 billion. We expect operating margin to be around 14%. We continue to expect lower cost of goods sold from freight at around 150 basis points of sales for the quarter. We also continue to expect $60 million of tariff impact net of mitigation efforts or around 360 basis points. Operating expense will be around last year as a percentage of sales. We see opportunities to incrementally invest in marketing, but this will be largely offset by leverage in other areas. We expect the Q4 tax rate around 30%. We expect net income per diluted share in the range of $3.40 to $3.70 with diluted weighted average shares expected to be around $47 million, including the anticipated impact of around $100 million in share repurchases for the quarter. To close things out, we entered the fourth quarter ready to compete with inventory aligned with trend and the right composition. We have great momentum having delivered against expectations these past 3 quarters on both top and bottom lines. Our brands are in great shape with Abercrombie brands making sequential improvement and Hollister brands taking share with impressive growth. We remain on the offense, investing in marketing through key brand collaborations and partnerships and with store expansion and digital enhancements that enable us to win in the long term. We look forward to a great holiday selling season. And we thank our teams around the globe for putting us in reach of record sales for fiscal 2025. And with that, operator, we are ready for questions. Operator: [Operator Instructions] First question comes from Dana Telsey with Telsey Advisory Group. Dana Telsey: So nice to see the sequential progress. Congratulations. Fran, as you think about the Abercrombie brand and the plan it's tracking to, what did you see by category, Men's and Women's? Does it differ by channel? How are you seeing the progress of the brand? And then just overall, international, any puts and takes on the different regions and countries? Fran Horowitz-Bonadies: Dana, so super excited about the results we just put up for the third quarter. I mean total company 12th consecutive quarter of growth, top line is 7%, comps at 3%. So the Abercrombie brand specifically continues to be strong. This is evidenced by a few things. Our traffic is positive. Our customer file continues to grow. We're seeing nice engagement in our digital and our stores channels, excited about where we're headed for the fourth quarter. The team has been busy at work all year testing and learning and really reacting to what's happening, heading into the fourth quarter, well inventoried and denim, fleece and sweaters very strong categories for us. As I mentioned, also 30 new stores to date, 6 more opening up this quarter. So we're fully prepared to compete for the fourth quarter. Robert Ball: Yes. Dana, I'll jump in here on the international side. So obviously, we continue to be really excited about the opportunities that we see for EMEA. We have invested in this region. We've got the infrastructure in place to take our brands to the market. This quarter, when you think about puts and takes, U.K. results were really strong. That's where we've been investing most to improve awareness and service our customers there. We're still in pretty early innings here in Germany and more broadly in the other European countries. We don't really have much of a presence or awareness. So we would anticipate seeing some shorter-term fluctuations here as we ramp those brands. But obviously, we see that as opportunity to go after. On the APAC side of the house, very similar dynamics here. The market is huge. Our business is relatively small. We're focused on building our brand awareness there and building a stronger presence. So again, not surprising for us to see some shorter-term fluctuations. But overall, really confident in the global opportunities that we see for our brands. Obviously committed to getting closer to those customers, deploying our playbook and ultimately taking these brands to market and growing this business longer term. Operator: Our next question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: Fran, the Hollister momentum has been really impressive and it seemed like the back-to-school momentum is continuing into holiday based on what we're seeing in stores. So just curious on how you expect to continue to build on that momentum as we look ahead into 2026. Fran Horowitz-Bonadies: Corey, yes, wow, what a year we're having with Hollister. Congrats to that entire team, super excited to grow the business another 16% on last year's 14%, the tenth consecutive quarter of growth. We are seeing balanced growth, Corey, across genders, across categories. We're seeing our AUR growing on lower discounts. The customer file is growing. Our traffic is strong. Most importantly, we're holding our inventory tight, so we can really Read & React to the business. We've got great momentum heading into holiday seasons. Honestly, there's almost every category is working, which is super, super excited. I'm sure you saw the announcement yesterday, this Taco Bell partnership for Cyber Monday, we're excited about. So lots of good things happening as we head into the fourth quarter. Corey Tarlowe: That's great. And then just a follow-up for Robert. How best to think about traffic versus ticket as we head into holiday? And then any comments on what that could mean for next year as well? Robert Ball: Yes. I mean, Corey, so across our brands, when we think about sort of tickets, I guess touching on tickets real quick, haven't taken any sort of meaningful tickets. We've been talking about this for a couple of quarters now through the holiday season, it's a nice interplay as you think about this holiday season, the best way to drive traffic and to engage with that consumer is going to be through promotions and pricing. So our tickets are pretty stable. We have started to think through and take tickets here post-holiday. So you'll start to see some ticket increases across the assortment here with spring deliveries. But the good news is the AURs are growing. We made sequential improvement from spring into fall across actually both brands, Hollister and A&F and we're seeing nice positive traffic. So traffic is growing across both Hollister A&F and across channels, which is great to see, and AURs are headed in the right direction. So customer files are growing, customers are engaged. Our teams are locked in with those customer bases. We've got the right inventory here in our stores to compete for the holiday. So we're excited to push through into Q4. Operator: Our next question comes from Matthew Boss with JPMorgan. Matthew Boss: So Fran, at the Abercrombie brand, could you speak to the cadence of trends that you saw over the course of the third quarter and elaborate on trends that you're seeing so far in November? And then Robert, could you speak to the composition of inventory across both brands and gross margin puts and takes to consider for the fourth quarter? Robert Ball: Yes. So, I'll jump in here. So we obviously had a really strong third quarter, delivering our 12th consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously, sequential improvement here. Hollister continues to grab share with that customer. We're excited about the momentum that we're carrying into Q4. In terms of the outlook, I think we're being reasonable, responsible here. We're happy with how the quarter has started. But as you know, Matt, all the volumes ahead of us here, and we're ready to compete. As it relates to the inventory side of the house, inventory is in good shape, up 5% year-over-year at cost with tariffs being about 3% of that. Units are pretty clean here and in control at up 1%, you know how we operate. We're going to keep units tight here and aligned with our forward growth expectations by brand. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, both brands are positioned to chase to close out the year. So we feel good about where we sit from an inventory standpoint. On the margin front, gross margin puts and takes here, down about 260 basis points year-over-year in Q3. 210 basis points of that is tariffs. We did see a benefit from freight. It was a smallish benefit from freight and AUR. And then we had a couple of offsets from third-party channels and some inventory reserves to keep ourselves clean headed into holiday. So that's Q3. And then Q4, we'll see some of those themes continue, Matt. You'll see about 200 -- or about 360 basis points of impact from tariffs from that roughly $60 million. And then the freight tailwind, as we've been talking about for the past couple of quarters will continue here, and you'll see about 150 basis points of tailwind here for Q4. And then you know how we operate from an AUR standpoint. We've been on this great multiyear journey of AUR growth here. We had a great holiday last season, so we're going to come into the fourth quarter assuming AURs hold. So assuming AUR is flat here as we think about the go forward. Operator: Our next question comes from Marni Shapiro with the Retail Tracker. Marni Shapiro: Congratulations on another great quarter, best of luck for the holidays in case I forget. Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have Kemo Sabe you did crocs. I'm curious, are these all global collaborations? Or are these specific to the U.S.? And if they're not global, will you do global? And as we think about the brands going forward into '26, I think these pops of excitement are fun. Are they bringing new customers into your store? And should we see an increase or similar cadence into '26? Fran Horowitz-Bonadies: Marni, the clubs are interesting. Our goal with our collaborations, honestly, is a real authentic branding moment. You know we talked about this a lot. We stay close to our customer and we listen to them, what's important to them, what's happening in their life moments. That's how we make these decisions to do these collaborations, so they are planned accordingly. . The NFL has been very exciting. Yes, it's definitely bringing in new customers. Our goal with that with the partnership was about brand awareness and customer acquisition. There's a big crossover with their fandom and our customer base, and we listened to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our way into it and have seen a nice success with it. Kemo Sabe is another great example. Western was happening. Our consumer was responding to it. We went to an authority in the business and made a terrific collaboration. The Taco Bell, we're super excited about for Cyber Monday. So as far as 2026 goes, we will continue to listen to our customer. We'll look for authentic moments to make sure that we stay close to them, and we'll continue on this journey. Scott Lipesky: Marni, it's Scott. Just to add on here. It really speaks to where the brands are today. Each brand is in such a strong position, which is enabling us to partner with other strong and great brands. So like Fran said, it's a great way to authentically connect to our customers and lots more ahead and it's been fun for the brands. Operator: Our next question comes from Alex Straton with Morgan Stanley. Katherine Delahunt: This is Katy Delahunt on for Alex Straton. Just thinking about the Abercrombie banner, I know you've all talked about sales growth being about flat for the fourth quarter. But what is the time line you're thinking about for return to sales growth and then even comp as well? Robert Ball: Yes. So Katy, it's Robert. So obviously, delivering sequential improvement here in Q3, that's important for us. The team has been focused on that customer. We're seeing improved product execution. Inventory is clean. And as Fran mentioned, we're placing our bets here for the holiday here in sweaters, fleece, denim. So we're happy about where the brand sits, heading into holiday. Marketing is resonating new collaborations that we just talked about with Marni here earlier. Those are great brand moments. They're driving traffic. Our customer file is growing. We've got strong engagement across both stores and DTC platforms here. So we're excited about this holiday season. We're aiming to continue to progress here, hold that brand flat against last year's record, which sets us up well for next year. Operator: Our next question comes from Mauricio Serna with UBS. Mauricio Serna Vega: Great. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, the plans for marketing this quarter, as you mentioned in the guidance for Q4 that assumes that there's more investment happening. And then maybe on the Abercrombie brand performance in Q3, could you break down like how the comps reflected AUR versus units or total sales? That would be very helpful. Robert Ball: Yes, Mauricio, let me jump in here real quick. Obviously, I'm not going to share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we either have announced in terms of like Taco Bell and you'll see the campaigns kind of continue as we move through the holiday time period. It's been effective. Our traffic is up, as we've mentioned a couple of times. We're pretty intentional with our marketing here. We're obviously focused on our brand building, driving customer engagement and ultimately supporting both near term and long term. So it's not all just what are we going to see this quarter, but we're really building these brands for the long-term growth. Obviously, looking at performance as we work to optimize that spend and where we see value, we're going to lean in. And we have 2 strong healthy brands, both exactly where we want them to be, and so we're going to keep our foot on the gas here. As it relates to A&F, Q3 performance, you heard us talk about comps there, the down 7%. AUR was sequentially improved. So we did see improvement there. So if you think about the KPIs and the puts and takes, we've seen traffic on the positive side. AUR was still down, but sequentially improved here from the first half into the third quarter. And then we had a little bit of pressure here on conversion as well, but conversion also headed in the right direction. So nice to see improvements in conversion, improvements in AUR and continued engagement from our customers with positive traffic. Operator: Our next question comes from Rick Patel with Raymond James. Rakesh Patel: Congrats on the progress. I was hoping you could double-click on the expectations around SG&A. I know marketing is going to increase, but you touched on being able to mitigate some of that pressure through other areas. So if you can expand on that, that would be great. And then second, just on comps, wondering if there's any variability performance to flag in the U.S. due to the weather or any regional differences. Robert Ball: Yes. So quick on the SG&A side of things, yes, we'll see a little bit of increased marketing investment year-over-year. We've obviously been leaning into this throughout the first 3 quarters of the year. That will continue, but at a slightly slower clip here in Q4. Q4, obviously, with the sales growth, you're going to see some expense leverage on the G&A side of the house. We've been delivering that throughout the entire year. And given the midpoint of our guide, we wouldn't expect a ton of leverage or deleverage in total at the midpoint of that 4% to 6%. We'll see as we have the rest of the -- as we have all year, as we outperform on the top line, you might see some leverage roll through. But again, we're going to be balanced in our investment approach and where we see opportunities to continue to invest in this business for the longer term, we will. Nothing really to call out from a regional standpoint. We've got a really broad store fleet. So weather in one area, it kind of offsets across the board. Might there be a day or a week here in there that you start to see little blips based on weather events, when you think about the broader quarter, it kind of all works itself out, and it's been pretty consistent for us across the regions. Operator: Our next question comes from Janine Stichter with BTIG. Janine Hoffman Stichter: Congrats on the progress. One more question about Abercrombie. It sounds like a lot of the improvement sequentially was led by Women. Can you just elaborate on what's going on in the Men's side. If I recall, the comparisons there maybe weren't as challenging as what you had in the first half with Abercrombie. So just help us understand what's going on with that side of the business? Fran Horowitz-Bonadies: Janine, it's Fran. Yes, led by Women's but also seeing nice sequential improvement in Men's as well. Again, inventories are clean, super excited about where we are for the fourth quarter. Team has been busy at work, testing and learning all season, so -- or all year pardon me, heading into the fourth quarter to make sure our inventories are where we want them to be, focused on categories like denim, fleece, and sweaters. So we feel good about the fourth quarter, heading into a big week, right, excited for seeing all the excitement out there for Black Friday and ready to compete. Janine Hoffman Stichter: And then maybe one for Robert, just on the tariffs, I think you said $60 million in Q4 net of mitigation. Any initial thoughts on just how to think about that in the first half of next year as you proceed with more mitigation efforts? Robert Ball: Yes. So we've talked quite a while, Janine, around our sourcing footprint. We've been obviously at work at this for quite a long time, starting way back in tariffs, 1.0. We've got a really well diversified sourcing footprint here. We source from over a dozen countries, which obviously gives us a benefit both from a cost negotiation standpoint as well as speed to market, which is obviously core to our model here. I think it's important for us to take a step back real quick and think about how we're entering this next chapter of tariffs. We're coming at this from a position of strength. We're coming off of 15% operating margins last year to go along with record net sales. The teams have obviously been active. We've got a proven playbook here. So they're leveraging the playbook. They're looking at country of origin footprint as well as finding expense efficiencies. And we've touched on this earlier. But while we haven't moved tickets broadly, through the holiday we are taking targeted price increases here for the spring. So that inventory will start delivering here post-holiday. We've done all of that as we've kind of been navigating 2025, and we've delivered record sales for the first 3 quarters of the year. We're positioned to do the same for the fourth quarter. And we've continued to invest in this business and return cash to shareholders. So bought back 350 million shares year-to-date, on track to do another $100 million here in the fourth quarter. So we're doing all this, all while delivering 13% to 13.5% operating margins despite this 170 basis points of tariff impact. So the company is strong. We feel like we're operating and executing at a high level. We'll detail a lot of the components out and the magnitude of some of the stuff for 2026 when we get into our next call. But suffice it to say that we're confident in our ability to navigate this environment. And obviously, our goal is to meaningfully offset these tariff headwinds longer term. Operator: [Operator Instructions] Our next question comes from Janet Kloppenburg with JJK Research Associates. Janet Kloppenburg: Congratulations on the upside. I wanted to ask a few questions. I'll give them to you right now. The tariff impact will be greater in the first quarter than the fourth quarter, Robert? I'm not sure on that. And the price increases, when do you expect those to be complete, like what we see a big bump in the first quarter and then you'll be done. Maybe you could talk to that cadence. And on cadence plan, I thought that the assortments that Abercrombie started to get better in mid-October and continued. And I'm wondering if you saw some response from the consumer on that unless I'm wrong. And then the fourth question is just on promo levels. What you saw in the third quarter year-over-year, what you experienced in the third quarter? And what's your thinking about for the fourth quarter? Robert Ball: All right, Janet. Fran Horowitz-Bonadies: Where do you want to start, Robert? Do you want to start to take the tariff one? Robert Ball: Yes, let's just keep the tariff conversation going here a little bit. So haven't quantified anything related to 2026. But as you think about how this is going to cadence out Janet, we would expect that a lot of our mitigation tactics, which we've been working at for the last 9 months here. Those will start to take hold heading into 2026. So the hope here and our confidence level and obviously, the pricing adjustments that we've made, which I guess is your second question. Those will start to show up here with spring deliveries. So think late December and into January, you'll start to see those tickets go up. And that will just kind of work through as the assortments and the newness flows through into the quarter. As you think about vendor negotiations and all those pieces and parts, that will also start to impact the first quarter here in 2026. So expectation would be that we would see some relief off of that Q4 tariff headwind of 360 basis points. Janet Kloppenburg: Yes, promos, and then Fran can talk to the A&F assortment. Fran Horowitz-Bonadies: Go ahead, finish the promos. Robert Ball: Yes. So from a promo standpoint, we feel good about the cadence that we've been operating under. We've obviously got a track record here of pulling back on promotions and improving AURs here wherever we can. AURs did see sequential improvements from front half into back half across the brands. Hollister is continuing to grow units on lower discounting with higher AURs. So headed into the fourth quarter, we're confident in our promotional plans. We've got the flexibility, and we've got the reactivity to adjust to demand as we see it come through. We're looking to hold those AURs flat for Q4. And like we do always, we'll come in every day. We'll see if we can pull back on a day of promos here, go a little bit shallower there. But it's been a nice formula for us with this multiyear AUR growth, and we're just going to keep -- we're going to keep executing that playbook. Fran Horowitz-Bonadies: And then just real quick on the last piece of that question. So I'm very excited to have announced that we made the progress that we committed to at the beginning of the year that we're seeing sequential improvement in Abercrombie, and that's really across the board in categories. So we're heading into the fourth quarter. We've committed to having clean inventories, and that's where we are. We feel really well positioned, Janet, for the fourth quarter. We are expecting to be -- our goal is to be approximately flat for the fourth quarter. That's on top of a record fourth quarter for last year. So we're happy with the start. The customer is resilient. Our file is growing, as I've said before, our traffic is positive, and we're ready to compete for the fourth quarter. Janet Kloppenburg: You're talking about A&F, Fran. Fran Horowitz-Bonadies: Janet, I'm talking total company, but yes, with A&F specifically, we committed to sequential improvement, and that's what we have delivered with a goal of approximately being flat for the fourth quarter. Janet Kloppenburg: Do you feel like the challenges that you faced in merchandising in the first half at A&F are now behind you? Fran Horowitz-Bonadies: Yes. We committed to getting clean. The opportunities in the first half, which we talked about on both of those calls are really the opportunity that the inventory was much more balanced between sale clearance and regular price. That was something that we didn't really have in 2024. And that's what drove the reduced AUR. As Robert mentioned, we've made sequential improvement in the AUR as we continue to see the customer responding to the newer product. Operator: There are no further questions at this time. I'd like to turn the call back over to Fran for any closing remarks. Fran Horowitz-Bonadies: All right. Thanks, everyone. Just wishing you all a happy holiday season, and we look forward to updating you soon. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Hello, everyone, and welcome to Burlington Stores, Inc. Third Quarter 2025 Earnings Webcast. Please note that this call is being recorded. [Operator Instructions] I'd now like to hand the call over to Mr. David Glick, Group Senior Vice President, Investor Relations. Please go ahead. David Glick: Thank you, operator, and good morning, everyone. We appreciate everyone's participation in today's conference call to discuss Burlington's fiscal 2025 third quarter operating results. Our presenters today are Michael O'Sullivan, our Chief Executive Officer; and Kristin Wolfe, our EVP and Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our expressed permission. A replay of the call will be available until December 2, 2025. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company's 10-K and in our other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today's press release. As a reminder, as indicated in this morning's press release, all profitability metrics discussed on this call exclude costs associated with bankruptcy acquired leases. These pretax costs amounted to $11 million and $0 million, respectively, during the fiscal third quarters of 2025 and 2024 and $28 million and $9 million, respectively, for the first 9 months of 2025 and 2024. Now here's Michael. Michael O'Sullivan: Thank you, David. Good morning, everyone, and thank you for joining us. I would like to cover 4 topics this morning. Firstly, I will discuss our third quarter results. Secondly, I will review our updated fourth quarter and full year guidance. Thirdly, I will provide some early thinking on the outlook for 2026. And lastly, I will comment on the progress we are making towards our longer-range financial goals. Then I will turn the call over to Kristin to provide additional details. Okay. Let's start with our Q3 results. Total sales increased 7% in the third quarter at the high end of our guidance. This was on top of 11% sales growth last year. This means that year-to-date, total sales have increased 8% on top of 11% year-to-date growth last year. Comp store sales for the third quarter increased 1%. We started the quarter well with a strong back-to-school trend, but in September, we saw a significant drop-off in traffic to our stores, driven by warmer-than-usual weather. As we have discussed previously, we have very strong brand equity in outerwear. Many shoppers still think of us as Burlington Coat Factory. Outerwear is a great business and a source of competitive strength. But this means that in Q3, our comp trend is very sensitive to weather, much more so than competitors. In some years, the impact is positive. In some years, it is negative. This year, it was negative. That said, in mid-October, once the weather turned cooler, our comp trend picked up to the mid-single digits. And that momentum of mid-single-digit comp growth continued through the first 3 weeks of November. Finishing up on Q3, I would like to comment on earnings. Despite the weather-driven slowdown in our sales trend in Q3, we still delivered margin expansion that was well ahead of last year and earnings growth that significantly beat our guidance. It's worth calling out that this was despite the considerable headwind that we faced from tariffs. Moving on to the fourth quarter. We are maintaining our previously issued comp store sales guidance of 0% to 2%. We feel good about our recent trend, but it is still early in the quarter. And in the coming weeks, we'll be up against very strong comparisons from last year. So it makes sense to remain cautious. That said, given the strong margin and expense trends that we are seeing, we are increasing our Q4 margin and EPS guidance. To be clear, we are adjusting our full year 2025 earnings guidance, passing along all of our beat to earnings in Q3 and factoring in our higher Q4 earnings outlook. I would like to call out that we started this fiscal year with EBIT margin guidance of flat to up 30 basis points. Our updated full year 2025 guidance now calls for expansion of 60 to 70 basis points. This is despite pressure from tariffs, and it is on top of 100 basis points of margin improvement in 2024. We are excited about the progress we are making on margin expansion. I will return to this topic in a few moments when I talk about our longer-range financial goals. But first, I would like to share our initial thoughts on the outlook for 2026. We are early in the budget process, but as a starting point, we are planning for total sales growth in the high single digits. We now expect to open 110 net new stores in 2026. This is higher than previously discussed, and it reflects the strength of our new store pipeline and the performance we are seeing from new stores. We are excited for these new store openings. For comp sales, we are assuming growth of flat to 2% in 2026. This should sound familiar. It is our typical off-price playbook. There is significant economic uncertainty, and we do not know how this might affect our business in 2026. So we will plan our business conservatively at 0% to 2% comp sales growth and then be ready to chase if the trend is stronger. In terms of operating margin expansion, for budgeting purposes, we are assuming that at 2% comp growth, our operating margin would be flat versus this year, then 10 to 15 basis points higher for each point of comp above 2%. Before I turn the call over to Kristin, there is one more topic that I would like to talk about. I would like to provide an update on our longer-range financial goals. As a reminder, 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income in 2028. The headline is that we feel good about the progress that we are making toward this goal. We are tracking in line with where we thought we would be at this point. We are especially pleased with the progress we have made in driving operating margin. This means that at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And of course, we will have achieved this despite the negative headwind from tariffs. Apart from margin expansion, the other drivers of our long-range financial model are new store sales and comp store sales growth. On new store sales, we are even more bullish now about our new store opening program than we were 2 years ago. Originally, we had assumed that we would open 100 net new stores a year in the period 2024 to 2028. In fact, this year, we will open 104. And in 2026, we are now planning to open 110 net new stores. Based on our new store pipeline, there is a possibility that we could sustain or even exceed this stronger pace of new store openings. The other major driver of our long-range model is comp sales growth. As I discussed in the context of our Q3 results, leaving weather aside, we feel good about the underlying comp trends that we are seeing. We believe that we can achieve average annual comp sales growth in the range of 4% to 5% over the remaining years of the long-range plan, in other words, between now and 2028. Of course, we recognize there are a lot of external variables that can affect comp growth. So in the nearer term, as we always do, we will plan our business conservatively and then chase. Now I would like to turn the call over to Kristin to review our Q3 results, updated 2025 guidance and high-level outlook for 2026 in more detail. Kristin? Kristin Wolfe: Thank you, Michael, and good morning, everyone. I will start with some additional color on Q3, then I will talk about our updated guidance. Lastly, I will comment on our initial outlook for 2026. Starting with the third quarter, total sales grew 7%, while comp store sales increased 1%, both within our guidance range. As Michael described, our comp trend in the third quarter fell off significantly after the back-to-school period, driven by warmer weather, but then picked up to mid-single digits in mid-October. The gross margin rate for the third quarter was 44.2%, an increase of 30 basis points versus last year. This was driven by a 10 basis point increase in merchandise margin and a 20 basis point decrease in freight expenses. Moving down the P&L. Our Q3 product sourcing costs were $214 million versus $209 million in the third quarter of last year. Product sourcing costs decreased 40 basis points compared to last year. This was primarily driven by leverage in supply chain through continued cost savings and efficiency initiatives. Adjusted SG&A costs in Q3 levered 20 basis points versus last year. This leverage was primarily achieved in store-related costs. Our store teams drove significant leverage in store payroll through numerous efficiency and productivity initiatives. Q3 adjusted EBIT margin was 6.2%, 60 basis points higher than last year. This was well above our guidance range of down 20 basis points to flat. Our Q3 adjusted earnings per share was $1.80, which came in well above our guidance range. This represents a 16% increase versus the prior year. At the end of the quarter, comparable store inventories were down 2% versus the end of the third quarter of 2024. Let me provide a little more context here. In Q3, we saw a significant slowdown in our comp trends, a weather-driven slowdown. But using our merchandising 2.0 tools, our planners and merchants were able to react very quickly to adjust receipts, especially in cold weather categories. So despite the slowdown, our store inventories are well balanced, current and very clean going into the fourth quarter. Moving on to our reserve inventory. Reserve inventory was 35% of our total inventory versus 32% of our inventory last year. In dollar terms, reserve inventory was up 26% compared to last year. We are pleased with the quality of the merchandise and the values and brands that we have in reserve. And as a reminder, we use reserve inventory as ammunition to chase the sales trend. For example, our reserve includes great outerwear buys that we made earlier this year that we've been pulling out over the last few weeks to fuel the trend since the weather turned cold in mid-October. We ended the third quarter with approximately $1.5 billion in liquidity. This consisted of $584 million in cash and $948 million in availability on our ABL. We had no outstanding borrowings on the ABL at the end of the quarter. During the third quarter, we repurchased $61 million in stock. And at the end of the quarter, we had $444 million remaining on our repurchase authorization. In Q3, we opened 73 net new stores, bringing our store count at the end of the quarter to 1,211 stores. This included 85 new store openings, 10 relocations and 2 closings. We now expect to open 104 net new stores in fiscal 2025, up from our original estimate of 100 net new stores. Now I will turn to our outlook for the fourth quarter and full year for fiscal 2025. We are maintaining our fourth quarter fiscal 2025 guidance for comp sales and total sales. We are guiding comparable store sales to be flat to up 2%, with total sales to increase 7% to 9% for the fourth quarter. We are raising our adjusted EBIT margin and adjusted earnings per share guidance for the fourth quarter. We now expect our adjusted EBIT margin to increase by 30 to 50 basis points. This margin outlook now translates to an adjusted earnings per share range of $4.50 to $4.70, an increase of 9% to 14% versus the fourth quarter of last year. For full year fiscal 2025, after factoring in our actual Q3 results and our improved outlook for Q4, we expect comp store sales growth of 1% to 2%, total sales to increase approximately 8% and EBIT margins to range from an increase of 60 to 70 basis points. As Michael noted earlier, this fiscal 2025 EBIT margin guidance is 40 basis points higher than our original full year guidance at the high end, and this is despite the significant pressure from tariffs. Finally, factoring in Q3 actuals and updated Q4 guidance, adjusted earnings per share are now expected to be in the range of $9.69 to $9.89, an increase of 16% to 18% for the full year 2025. Finally, I would like to touch on our preliminary FY '26 outlook. We are in the early stages of the budgeting process, so this could change. But at this point, we are planning on total sales growth in the high single digits. We are assuming at least 110 net new stores, and we're planning comp store sales in the range of flat to up 2%. For operating margin, as Michael said, we are assuming that at a 2% comp growth, our operating margin will be flat to this year, and we expect leverage of 10 to 15 basis points for each additional point of comp. And now I will turn the call back over to Michael. Michael O'Sullivan: Thank you, Kristin. Before I turn the call over to the operator for your questions, I would like to summarize a few of the key points from today's call. Firstly, Q3 was impacted by warmer weather in September through early October. Once the weather normalized, our trend improved to mid-single-digit comp growth. And we are off to a strong start to Q4 with comps up mid-single digits for the first 3 weeks of November. Secondly, we are pleased with our margin trends. We are updating our full year 2025 guidance to reflect the earnings beat in Q3 as well as our improved earnings outlook for Q4. At this point, we are maintaining our previously issued Q4 comp guidance of 0% to 2%. Thirdly, we are pleased with how we are tracking towards our long-range financial goals, especially the pace of margin expansion. And within this long-range financial plan, we think there may be additional upside in terms of our new store opening program. Now I would like to turn the call over for your questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Boss of JPMorgan. Matthew Boss: So on relative performance, your comp this quarter came in below both of your off-price peers. This is a clear reversal from results in the second quarter and over the last year. Clearly, you cited weather was a factor, but how concerned are you by this change in your relative comp versus peers? Michael O'Sullivan: Thank you for the question. You're right. Just to lay out the facts, we ran a 1% comp in Q3. Our peers were 6% and 7%, very impressive. That's a very significant difference. I can't give you a complete bridge, but at a high level, let me try and dissect that gap. I'll start with the obvious. We know that weather was the biggest driver of our slowdown in Q3. That's not an excuse, but it is a partial explanation. We changed our name some years ago, but shoppers still call us Burlington Coat Factory. So mild weather in September and October has a huge impact on our business. This is a real thing, and it is unique to us, I think, versus our peers. Now in September and October, cold weather merchandise balloons to more than 20% of our assortment. In the third quarter, our comp sales for ladies and men's coats, jackets, boots and cold weather accessories, all these important categories were down double digits. Now they bounced back in mid-October once it turned cold. But by then, it was too late to really drive the quarter. Let me go a little further and try to quantify the weather impact on our comp in Q3. If you strip out the drag on our overall comp from cold weather categories, the categories I just listed, and if I make an adjustment for the impact that lower weather-related traffic had on the rest of the store, then I can get to the low end of a mid-single-digit comp. In other words, I do not get to 6% or 7% comp. So in my view, weather only explains half of the gap versus peers. Now usually, in off-price, when your comp is lower than your peers, it's just the customer telling you that they preferred the value and the assortment that they found elsewhere. In the second quarter, when we ran a 5% comp growth ahead of our peers, the customer was voting for us. But in Q3, that changed. And we have some hypotheses on why, but we have more work to do to really tear that apart and then aggressively go after that performance difference. But before I leave the question, let me just call out a silver lining. The comp numbers that our peers have just reported reaffirm that the off-price shopper at all income levels is alive and well. Leaving aside the weather, the major implication for us is that we need to take better advantage of that than we did in the third quarter. Matthew Boss: Great. And then, Kristin, as a follow-up, could you provide more color on the 60 basis points of operating margin expansion in the quarter, particularly just given as we think about the pressures that you faced from tariffs and the 1% comp? Kristin Wolfe: Matt, thanks for the question. Yes, first, it's worth reiterating that we really are pleased with the 6.2% operating margin in the quarter, up 60 basis points versus last year on a 1% comp, as you noted in your question. Let me provide the major puts and takes. Starting with gross margin. First, our merchandise margin increased 10 basis points. And within merchandise margin, there was a lot going on. Tariffs had a negative impact on markup, but we were able to offset this impact through numerous actions such as negotiating with our vendors, adjusting the mix and driving a faster turn. The net impact of all this was much more favorable than we originally guided back in August. This was really driven by our tariff mitigation strategies. Now staying in gross margin, freight levered by 20 basis points. This was due to greater efficiencies and cost savings initiatives, particularly in transportation. So our overall gross margin increased 30 basis points versus the third quarter of last year, all this despite the impact from tariffs. On product sourcing costs moving down the P&L, we drove 40 basis points of leverage here. This was driven by supply chain and efficiency initiatives in our DCs. We're excited about the consistent progress we've made in streamlining our supply chain costs. And moving on to SG&A, we showed about 20 basis points of leverage here on a 1% comp, and this was driven by efficiency initiatives in stores such as speeding up checkout times at point of sale. Offsetting this leverage was higher depreciation, which delevered about 20 basis points, driven by increased CapEx in supply chain and new stores. So taken all together, this drove the 60 basis points of EBIT expansion in the quarter. Operator: Next question comes from the line of Ike Boruchow of Wells Fargo. Irwin Boruchow: I guess my question kind of piggybacking off of Matt's. So the comp growth in Q3 was lower than peers, but the margin and earnings were actually pretty much better. How should we reconcile that? And then really more importantly, are there choices that you made during the quarter that may have driven the higher margin in Q3 at the expense of sales? Michael O'Sullivan: Well, I'll take that, Ike. Thank you for the question. It's a good question. I think the direct answer is yes. There were decisions or choices that we made that helped drive our margin in Q3, but may have had a negative impact on our sales. And I'll give you a couple of examples, but maybe I should just preface what I'm going to say with a couple of points. Firstly, our margin and earnings performance in Q3 was very strong. Margins were up 60 basis points and adjusted EPS grew 16%. We've also taken up full year earnings guidance. In other words, we've rolled right over tariffs. Secondly, on comp sales, to reiterate, the biggest driver of the slowdown that we saw was weather. If I adjust our comp for weather, we probably would have been pretty happy with the outcome. But as I explained a moment ago, that only explains half of the gap between our 1% comp growth and our peers' 6% and 7% comp. So if I come back to your question, yes, there were choices that we made that might explain our relatively strong margin and earnings performance and our weaker comp growth in Q3. Now these were choices that we made as part of our tariff mitigation strategies. And let me describe two specific examples. When -- firstly, when tariffs were introduced -- first introduced, we reduced our sales and receipt plans for categories where the margin impact was too significant. We did not feel like we could raise retails in those categories, and we did not want to accept the margin compression. That meant that in some businesses, especially some categories in home, our inventory levels and assortments were -- they were very light in Q3. And we saw that in terms of the sales in those categories. The sales were lower. Now that wasn't an error. It was a deliberate decision. I would say it was an economically rational decision, and it worked. It may have hurt sales, but it drove our earnings in Q3. Now I should add that as tariff rates have come down, we've gone back and we've taken up sales and receipt plans in most of the categories that were affected. So I would expect this impact to be less significant in Q4. A second example, as Kristin described a moment ago, another step that we took to help offset tariffs was to trim inventory levels in many businesses across the store and force a faster turn. Again, this helped to offset the margin pressure from tariffs. Now we only really took that step in Q3, not in Q4. We already turned very fast in Q4. So we didn't want to try and force a faster turn going into holiday. But again, in Q3, that approach drove earnings, but it may have hurt sales. So -- for both of the examples I've just given, at a high level, those decisions worked. We fully absorbed tariff pressure on our margin, and we drove very strong margin and earnings growth in Q3. And all this happened actually despite a slowdown in comp sales due to weather. Normally, a slowdown like that would drive deleverage. Anyway, with that said, we really need to do a full after-action assessment on Q3. Now that we have our competitors' comp results, we need to go back and hindsight our performance and identify anything we could have done or should have done differently. Irwin Boruchow: Got it. And then maybe, Kristin, just to elaborate maybe a little more on the 2026 initial outlook, key risk opportunities in the outlook, anything else you could share? Kristin Wolfe: Yes. Great. Thanks, Ike. We're still -- it's still somewhat early in the process. We're actively working through the budget for 2026. But let me give some headlines or how we're thinking about it. The outlook for next year is pretty hard to predict with significant economic and political uncertainty that could absolutely affect consumers' discretionary spending. There are potential tailwinds like the possibility of higher tax refunds in the early part of next year. And then there are potential headwinds like tariff-driven price increases, which could put additional inflationary pressure on our core customer. Michael spoke to this earlier, but given this uncertainty, we're planning to stick with our off-price playbook. That really means planning comps at flat to 2% and positioning us to chase the trend if it's stronger. In terms of new stores, we mentioned this in the prepared remarks, but it's worth reiterating, we feel very good about the new store pipeline. We are planning to open at least 110 net new stores in 2026. So combined with our comp guidance, this should drive a high single-digit increase in total sales. On the operating margin side, as we said, we're modeling operating margin flat to last year at the 2% comp. We do expect 10 to 15 basis points of leverage for every point above a 2% comp. And then there's a couple of things in the margin, a couple of puts and takes. We are planning for slightly higher merch margin as we look to offset any impact of tariffs, particularly as we lap the fall season next year. We're planning for continued supply chain productivity gains next year, but there will be offsets here due to the start-up costs and the initial ramp-up of our new Southeastern distribution center, which we plan to open in the first half of 2026. And finally, we do expect fixed cost leverage on the high single-digit total sales growth, but we also are expecting higher depreciation, which creates deleverage. The higher depreciation is really due to the higher CapEx spend in supply chain and our increased number of new stores. Those are really the main call-outs for 2026 at this point. Operator: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Lorraine Maikis: Michael, one of your off-price peers is accelerating comps with more focus on marketing, more in-store inventory and a store refresh. Do you see any risk that Burlington will lose market share? Michael O'Sullivan: Lorraine, thank you for the question. It's a good question. I'm going to avoid talking about any specific competitor, but I think I can still try to answer your question maybe in more general terms. I'll start by saying that actually, we like innovation and fresh ideas. We believe in off-price retail. And anything that drives off-price awareness and excitement is a good thing. In fact, I'd go further and say that a strong off-price sector is important for us. So it's good that our off-price peers are achieving very strong results. But your question was more about potential risks to Burlington. So let me come at it from that angle. I think there are 2 important points that I would make here. Firstly, when we talk among each other -- to each other and when we talk to analysts and when we talk to investors, I think we sometimes talk about off-price as if it were a separate isolated ring-fenced segment of retail. But the customer does not think of it that way. The customer does not respect the boundaries of off-price. If she needs a pair of pants or a dress, she might shop Burlington or one of our off-price peers. But we know from our own research that she also cross-shops department stores, specialty retailers. In fact, any retailer where she likes the assortment, she doesn't care about our off-price business definition. She just cares about finding a great deal and great value in the categories, brands and styles that she's looking for. Now if you're an off-price -- if you're an investor in off-price, I think it's very important that you understand this. This is not like the retail market for office supplies. We aren't 3 companies just scrapping it out for market share in a limited space called off-price. It's bigger than that. We compete in a very large and competitively fragmented market for apparel, accessories, shoes, home, beauty and so on. Off-price is really just a small part of that overall market. Our opportunity is to take share from non-off-price retailers. That's what has been happening over a long period of time. So I mean, just to bring it up to -- just to throw in some numbers, today, we announced 7% total sales growth in Q3 on top of 11% growth last year. At those growth rates, it's self-evident that we are taking market share, but so are our off-price peers. These share gains are not coming at the expense of each other. Mathematically, that wouldn't be possible. These share gains are coming from non-off-price. And I think that the shift from traditional full-price retail to off-price is unlikely to end anytime soon. So that's the first point. The second point I would make is that despite everything I've just said, I think it's very important and useful for us to pay close attention to our off-price peers. They matter. They operate a similar business model to us. They've been very successful over the years, and we can learn a lot from them. So if our off-price peers come up with new ways of doing things, new processes in stores, new innovative marketing programs, then we need to pay close attention. Now not all of those ideas will work, of course. And certainly, not all of them will make sense for us, but we need to be open to new ideas that could help drive our business and actually drive off-price retail in general. Let me finish up. Again, your question was about risk to Burlington. Right now, I see off-price as a whole as being very healthy. For 2025, we now expect to grow total sales by 8% on top of 11% last year. And at the high end of our guidance, we now expect to achieve EPS growth of 18% on top of 38 -- sorry, 34% last year. Those are -- by any metric, those are very healthy numbers. I anticipate that our off-price peers are going to be successful, too. But I don't see that as a risk. In fact, it's better for us if the off-price segment as a whole continues to perform well. Lorraine Maikis: And I wanted to follow up on pricing. Did you take price in 3Q? And what impact did that have on your comp? And then what's your strategy on pricing for the fourth quarter? Michael O'Sullivan: Yes. That's a good question. I would sum up our pricing strategy in 3 words. Be very careful. We recognize that because of tariffs, prices are going up across the retail industry, but we will not raise prices unless we've seen them go up elsewhere. And even then, we will test and monitor the impact of those price increases. We've said this many times before, we have a very price-sensitive customer. We know that the reason that they shop at Burlington is that they're looking for a great deal. Our core strategy is to offer great value. And of course, that means keeping prices low. Now our approach to tariffs this year has been to avoid retail price increases and to focus instead on finding other margin and expense offsets. Kristin described those actions earlier. We're very pleased with how that approach has worked. It's allowed us to avoid price increases, but still to grow margin and earnings this year. Now of course, we have tested some things. We've tried some higher prices. And in Q3, when we saw other retailers take prices up, we tested higher retails in some categories. But I would say that those pricing tests were in a very limited number of areas. And mostly the higher retails worked. We saw very little resistance from customers. So going forward, I would say that we will probably get more aggressive, but we kind of have to see what happens in Q4. And also, of course, we need to see what happens with tariff rates going forward. Operator: Your next question comes from the line of John Kernan of TD Cowen. John Kernan: Michael, sounds like you see an opportunity to take up the number of new store openings and the cadence of growth. Can you expand a bit upon this? What are you seeing in terms of the new store pipeline, both from a real estate perspective and also potential new store productivity? Kristin Wolfe: John, it's Kristin. I'll take this one. We're really pleased with the performance of our new stores across the board, they've been delivering results that are in line or better than expectations as well as our financial hurdles. It really reinforces the strength of our site selection process and the appeal of Burlington really across markets. And it's worth pointing out just some data. Our Q3 comp, of course, was at the midpoint of our guidance, but our total sales growth in Q3 was at the high end of our guidance, up 7%, and this was driven by new stores. And based on our Q4 guidance, our total sales increase is planned at 9% at the high end as we benefit from the slew of new stores we just opened in the third quarter, 73 net new. Now as I mentioned in the prepared remarks, we now expect to open 104 net new stores this year. This is a modest step-up from our original plan of 100 net new. And this increase reflects really two things. First, the ability to pull forward some openings that were originally slated for 2026; and secondly, the strength of our real estate pipeline. Looking ahead to 2026, we're raising that new store target to at least 110 net new stores. This is supported by this robust pipeline, but also by 45 leases we secured from the Joann Fabrics bankruptcy. These incremental sites really give us confidence in sustaining the high level of growth next year. And as for the pipeline for 2027 and beyond, it's still early to provide specific numbers, but I will say we feel very good about the long-term opportunity. Our real estate team continues to identify attractive locations, and we already have a very healthy pipeline for new stores beyond 2026. John Kernan: Got it. Maybe as a follow-up, obviously, all 3 off-price retailers are resonating strongly with consumers. I liked how Michael framed the industry's opportunity. You're clearly feeling more bullish on the number of stores, maybe a little bit more cautious on comp sales, but more bullish on the potential margin expansion potential for the business. Is that the right way to think about it? Kristin Wolfe: Great. Yes. John, thanks for that question. It's a good question. So 2 years ago, we shared our objective of getting to approximately $1.6 billion in operating income by 2028. The headline is that we feel very good about the progress we're making toward this goal. We're tracking in line with where we thought we would be at this point. And we're especially pleased with the progress we made in driving operating margin at the high end, Michael said this earlier, but it's worth repeating, at the high end of our updated 2025 margin guidance, we will have achieved 170 basis points of the 400 basis points of opportunity that we identified 2 years ago. And we will have achieved this despite the negative headwind from tariffs. So really, to sum up, we're pleased with the progress. But the way you characterized the long-range model and your question is about right. It's true, we're more bullish on new stores, and we are more bullish on margin expansion. On the comp, we still believe we can drive an average annual comp growth of 4% to 5% over the remaining 3 years of the long-range plan, but we recognize that there is external uncertainty, so we are slightly more cautious here. Operator: Question comes from the line of Brooke Roach of Goldman Sachs. Brooke Roach: Michael, I'd like to ask you about the trends that you're seeing with the lower income customer. How did these customers perform in the third quarter? And are there any other callouts in terms of customer demographics that are worth sharing? Michael O'Sullivan: Brooke, thank you for the question. The headline is that we feel very good about the lower-income customer. We've been -- and the trends that we're seeing with that demographic. We've been watching this particular demographic segment very closely all year. This is a critical customer for us. Given the economic uncertainty and the cost of living issues, we've been concerned about lower-income customers. But the good news is that this customer has been very resilient. When we look at our stores in lower-income trade areas, they continue to outperform the chain. This has been true for several quarters now. I should say, as we listen to other retailers, it seems like this is a consistent pattern. Many retailers are reporting strength with lower-income consumers. There is -- in terms of other demographic call-outs, there's one other call out, specifically relating to Hispanic customers. Again, we've been watching this demographic very closely all year. It's an important customer for us. We have many stores across the country that are in trade areas with a high proportion of Hispanic households. You may recall that in previous quarters, we've said that our stores that are in trade areas with a high proportion of Hispanic households have been slightly outperforming the chain in terms of comp growth. While in Q3, the trend in those stores slipped. They've gone from slightly outperforming the chain to trailing the chain. Now the change in trend for those stores varies a lot depending on the specific market and even the specific or the particular location of the store. In other words, it's very localized to what's happening in those particular cities. And of course, it's difficult for us to say how long those localized slowdowns might last. Brooke Roach: Great. And then my follow-up would be for Kristin. Kristin, can you give us more color about your guidance for the fourth quarter, both in terms of comp sales and for earnings? Kristin Wolfe: Brooke, thanks for the question. Sure. Let me repeat a little bit. I think it's worth reiterating some of what we described earlier. On comp store sales and total store sales, we're maintaining our Q4 previously issued guidance. So comp of flat to 2% and total sales growth of 7% to 9%. We do, as we said, feel really good about our recent trend in Q4, but it's still early in the quarter. The critical weeks are ahead of us. And in those coming weeks, we'll be up against very strong comparisons from last year. So we'll continue to take a cautious approach on sales. On the margin side, we are increasing our margin and EPS guidance for Q4. We now expect our Q4 adjusted EBIT margin to increase by 30 to 50 basis points. We do anticipate some tariff-driven pressure on merch margin in Q4 but we expect to more than fully offset that pressure and drive overall operating margin expansion in Q4 versus last year. And the drivers of the margin leverage should largely be similar to what we saw in Q3. We expect continued cost savings in freight and supply chain and in store-related initiatives. And finally, we should also see additional leverage in SG&A given the higher incentive comp accrual in the fourth quarter of last year. Operator: The question comes from the line of Alex Straton of Morgan Stanley. Alexandra Straton: Michael, can you talk about the availability of off-price merchandise as you're heading into the fourth quarter? And then I have a quick follow-up. Michael O'Sullivan: Yes. Alex, thank you for the question. I would characterize the buying environment for off-price as very, very strong. Earlier in the year, when tariffs were first introduced, there were some concerns, a lot of concerns about whether vendors would be reluctant to bring potentially excess merchandise into the country. But frankly, those concerns have just not materialized. Even some of the categories where supply was tighter in the summer, categories like housewares and home also housewares and toys have come back. I think that's probably pretty consistent with what you've heard from our off-price peers. There's a lot of great merchandise at great values, and we're taking advantage of it, both to flow to stores and to build up reserve. Alexandra Straton: Perfect. And then just on the cold weather merchandise in the quarter. Is there any just additional detail you can provide on that dynamic, the impact on the overall comp for the chain? I know you've given a lot of details, but anything else worth highlighting there? Michael O'Sullivan: Sure. Yes. Yes. So after back-to-school, the cold weather merchandise becomes very important to our mix. As I said earlier, it expands to more than 20% of our total assortment during the quarter. Now cold weather merchandise, just to define it, includes categories like coats, jackets, boots and accessories like gloves and scarves. So it's only stuff you need if it's cold outside. And our customer is very need-driven. For September through mid-October, our comp sales in those businesses were down in the negative mid-teens. Then in the last 2 weeks of October, once the weather turned cold, they grew up double-digit comp. Maybe if I step back for a moment, there are 2 ways in which milder weather in September and October affects our business. There is the direct drag on our overall comp growth from lower sales in the cold weather categories that I just mentioned. That's one impact. But there is also an impact on our non-cold weather businesses because if you think about it, if the customer comes in to buy a coat, she's probably going to put some other things in the basket, too. So if -- because the weather is mild, she doesn't come into the store to buy that coat, then this doesn't just hurt our coat sales, it impacts other businesses as well. Now mathematically, the drag on our overall comp from cold weather categories alone was worth about 200 basis points in Q3. If you then add the impact that lower traffic had on other non-cold weather categories, you can easily get up to a few points of comp. And I think that's somewhat consistent with the fact that we saw a bounce back to mid-single-digit comp growth in the second half of October once the weather had turned cold. Operator: Your last question comes from the line of Mark Altschwager of Baird. Mark Altschwager: Kristin, could you give us some more detail on regional trends, category trends as well as any of the detailed comp metrics for Q3? Kristin Wolfe: Mark, yes, absolutely. In terms of regional performance, the Southeast was our strongest region in the quarter. The West, Northeast and Midwest were in line with the chain, while the Southwest trailed the chain. On category performance, we saw the strongest performance in beauty, accessories and shoes. Apparel comp slightly above the chain, while home was softer, comping below the chain in Q3. In terms of the comp metrics, our traffic was down in the third quarter. That was largely driven by September and early October when weather was unseasonably warm. And this lower traffic was offset by a higher average basket size. So for the quarter, we were pleased to see that both conversion and basket size or average transaction size were higher than last year. So this tells us that once she's in the store, she liked what she saw. Mark Altschwager: Excellent. And then, Michael, as we look at the Q4 comp guidance, do you view that as conservative just given typically less weather sensitivity in the fourth quarter? Michael O'Sullivan: Mark, sometimes when we give comp guidance, we'll also sort of signal, if you like, if we think there may be upside. I don't think -- I don't see a lot of upside in our Q4 comp guidance. The reason I say that is that we're up against 6% comp growth from Q4 last year, so 6%. If you take our 0% to 2% guidance, that gets you to a 2-year stack of 6% to 8%. Now we exceeded that in Q2 of this year, but we were well below it in Q3. I should also add that when I look at our off-price peers, the way I'm interpreting their guidance, it looks like they are slightly below us on a 2-year stack basis. So even though we're happy with our recent trends and with how we started the quarter, and we're excited for our holiday assortments. We're not anticipating significant upside to our Q4 comp sales guidance at this point. Operator: I'd now like to hand the call back to Mr. Michael O'Sullivan for final remarks. Michael O'Sullivan: Let me close by thanking everyone on this call for your interest in Burlington Stores. We would like to wish you all a very happy Thanksgiving. We look forward to talking to you again in March to discuss our fourth quarter and full year 2025 results. Thank you for your time today. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Good afternoon, everyone, and welcome to PriceSmart, Inc.'s Earnings Release Conference Call for the First Quarter of Fiscal Year 2026, which ended on November 30, and 2025. After remarks from our company's representatives, David Price, Chief Executive Officer; and Gualberto Hernandez, Chief Financial Officer; you will be given an opportunity to ask questions as time permits. As a reminder, this conference call is limited to 1 hour and is being recorded today, Thursday, January 8, and 2026. A digital replay will be available shortly following the conclusion of the call through January 15, 2026, by dialing 1 (800) 770-2030 for domestic callers or 1 (647) 362-9199 for international callers and entering replay access code 5898084#. For opening remarks, I would like to turn the call over to PriceSmart's Chief Financial Officer, Gualberto Hernandez. Please proceed, sir. Gualberto Hernandez: Thank you, operator, and welcome to PriceSmart Inc.'s earnings call for the first quarter of fiscal year 2026, which ended on November 30, 2025. We will be discussing the information that we provided in our earnings press release and our 10-Q, which were both released yesterday on January 7, 2026. Also in these remarks, we refer to non-GAAP financial measures. You can find a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP measures in our earnings press release and our 10-Q. These documents are available on our Investor Relations website at investors.pricesmart.com, where you can also sign up for e-mail alerts. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements concerning the company's anticipated plans, revenues and related matters. Forward-looking statements include, but are not limited to, statements containing the words expect, believe, plan, will, may, should, estimate and similar expressions. All forward-looking statements are based on current expectations and assumptions as of today, January 8, 2026. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the risks detailed in the company's most recent Annual Report on Form 10-K, the quarterly report on Form 10-Q filed yesterday and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. These risks may be updated from time to time. The company undertakes no obligation to update forward-looking statements made during this call. Now I will turn the call over to David Price, PriceSmart's Chief Executive Officer. David Price: Thank you, Gualberto, and good morning, everyone. Thank you for joining us today. I want to begin by expressing my gratitude to our employees across all the regions where we operate. This first quarter through December represents our peak season, our most demanding period, and our teams rose to the challenge. From our clubs to our distribution centers to our offices across all of our countries, every part of our organization contributed to our success. Their execution was outstanding, and their dedication and commitment to serving our members continues to be the foundation of our success. It's a pleasure to be back with you for my second earnings call as CEO. I'm now about 128 days into the role, and I've spent this time visiting clubs, distribution centers and offices across our markets. What strikes me most is the strength of our culture, teams across 13 countries united by a commitment to doing the right thing for our members and their communities. This foundation, combined with the opportunities ahead, gives me great confidence in our future. I'm energized by what we can accomplish together. I'm pleased to share that we delivered strong results across our key performance areas. Our membership growth, solid sales performance and continued operational discipline reflects both resilient consumer demand and the outstanding execution by our teams. Now I'd like to highlight some of our sales results for the first quarter. Net merchandise sales and total revenue reached almost $1.4 billion during the first quarter. Net merchandise sales increased by 10.6% or 9.5% in constant currency. Comparable net merchandise sales increased by 8% or 6.9% in constant currency. During the first quarter, our average sales ticket grew by 2.1% and transactions grew 8.4% versus the same prior year period. The average price per item increased 1.8% year-over-year while average items per basket remained relatively flat. First, in Central America, where we had 32 clubs at quarter end, net merchandise sales increased 9.6% or 9.2% in constant currency. Comparable net merchandise sales increased 5.4% or 5.1% in constant currency. All of our markets in Central America had positive comparable net merchandise sales growth. Our Central America segment contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Second, in the Caribbean, where we had 14 clubs at quarter end. Net merchandise sales increased 5.7% or 7.8% in constant currency. Comparable net merchandise sales increased 5.6% or 7.7% in constant currency. All of our markets in the Caribbean had positive comparable net merchandise sales growth. Our Caribbean region contributed approximately 160 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the first quarter. Last, in Colombia, where we had 10 clubs opened at the end of our first quarter, net merchandise sales increased 27.8% or 15% in constant currency. Comparable net merchandise sales increased 27.9% or 14.7% in constant currency. Colombia contributed approximately 320 basis points of positive impact to the growth in total consolidated comparable net merchandise sales for the quarter. In terms of merchandise categories, when comparing our first quarter sales to the same period in the prior year, our foods category grew approximately 11.3%. Our non-foods category increased approximately 7.2% and our food service and bakery category increased approximately 10.1% and our health services, including optical, audiology and pharmacy, increased approximately 17.8%. Membership accounts grew 6.7% year-over-year to over 2 million accounts with a strong 12-month renewal rate of 89.3% as of November 30. A key focus of our membership strategy is growing Platinum memberships. Platinum is our premium tier designed for our most engaged members. These members receive an annual cash back reward on eligible purchases which drive loyalty, increases purchasing frequency and rewards their continued business with us. By focusing on Platinum growth, we are investing in our highest value member relationships. As of November 30, Platinum accounts represented 19.3% of our total membership base, up from 14% in the same period last year. This growth reflects our targeted promotional campaigns and increased focus on the segment. Membership income as a percentage of revenue increased to 1.7% compared to 1.6% in the prior year period, driven in part by the shift towards Platinum membership. These strong results reflect our team's execution and the strategic initiatives we have underway. Let me walk you through the progress we're making across real estate expansion, supply chain transformation and technology investments that are enhancing our ability to serve our members. In the third quarter of fiscal year 2025, we purchased land for our sixth warehouse club in the Dominican Republic in La Romana. That's about 73 miles east of our nearest club in Santo Domingo. The club will be built on a 5-acre property and is expected to open in spring 2026. In Jamaica, we're expanding from 2 clubs to 4, in the first quarter of fiscal year 2026, we purchased land in Montego Bay for our third club, and that's about 100 miles west of Kingston. This will also be a 5-acre site anticipated to open in fall 2026. Also in the first quarter of fiscal year 2026, we finalized the land lease for our fourth Jamaica Club on South Camp Road. That's about 6 miles from our existing Kingston Club. This will be a 3-acre property also anticipated to open in winter 2026. The opening time line for our Jamaica clubs has been adjusted as we address operational disruptions caused by Hurricane Melissa and support recovery efforts across the island. I'm pleased to report that our existing clubs in Kingston and Portmore weathered the storm well, and we're back serving members almost immediately. We do not anticipate any further delays to our new club openings at this time. In addition, in the second quarter of fiscal year 2026, we purchased land for our 10th warehouse club in Costa Rica, Ciudad Quesada. That's approximately 47 miles north from our nearest club in Costa Rica. The club will be built on a 6-acre property and is anticipated to open in fall of 2026. Once these 4 new clubs are open, we will operate 60 warehouse clubs in total. We are advancing on our plans to enter Chile, a market that we believe offers strong potential for multiple PriceSmart warehouse clubs. As part of this initiative, as you know, we've hired a country general manager and signed executory agreements for 2 prospective club sites. While we haven't announced target opening dates, we're moving quickly in managing key factors that influence timing, such as permitting and construction. In addition to opening new clubs in existing markets and Chile, we're continuing to optimize our current footprint, increasing club size, improving efficiency and expanding parking spaces at high-volume locations remains some of the most effective ways to drive sales and enhance the member experience. To support this strategy, we will begin warehouse club and parking lot expansion and remodels in fiscal year 2026 in Portmore, Jamaica and Barbados. Now turning to our supply chain transformation strategy. One of the key drivers in keeping prices low is improving how we move and distribute merchandise to our clubs. Today, we operate major distribution centers in Miami, Costa Rica, Panama and Guatemala. During the first quarter, we successfully adapted our Panama facility to handle cold merchandise and began operations at our new distribution center in Guatemala. We now plan to open distribution centers in Trinidad, Colombia and the Dominican Republic during fiscal year 2026. Our goals with these distribution centers are to improve product availability, reduced lead times and lower landed costs, among other efficiency gains. Alongside these new distribution centers, we've begun implementing third-party distribution centers in China to consolidate merchandise source in the country, driving greater efficiency and lowering costs. In select countries, we've also introduced our own fleet of trucks to deliver merchandise directly to our clubs and capitalize on backhaul opportunities. We continue to advance our migration to the RELEX forecasting and replenishment platform, and we remain on track to complete the full implementation in fiscal year 2026. This upgrade is a critical part of our supply chain strategy and is expected to boost productivity, improve inventory management and increased in-stock availability, ultimately driving sales growth and operational efficiency. During the first quarter, we advanced our multiphase implementation of the e2open global trade management platform designed to enhance automation, compliance and controls across global import and export operations. We believe this platform will strengthen trade compliance, improve data visibility and support scalable international growth once fully implemented. Turning now to other ways we're enhancing membership. For the first 3 months of fiscal year 2026, private label sales represented 27% of total merchandise sales, down 70 basis points from the same period last year. This was impacted by a reclassification of the produce category. And on a comparable basis, we would have had a 70 basis point increase in penetration of our private label. Our private label brand, member selection is a cornerstone of our strategy. What makes our private label program unique is that we develop products both centrally through our U.S. buying team and locally through our country-based buyers. This development approach enables us to source private label products globally, regionally and locally providing flexibility to deliver the best quality and value. Together, this allows us to offer member selection products that combine global scale and quality with local relevance. Private label serves multiple strategic purposes. It allows us to offer high-quality products at lower prices than national brands, driving member loyalty. It improves our margins. and it gives us leverage with national brand suppliers by providing a trusted alternative that keeps them competitive. We're committed to growing this penetration through strategic product development, for example, recent additions like Organic Maple Syrup, Aged Scotch Whiskey and premium deli meats demonstrate our focus on delivering exceptional value across key categories. In the Dominican Republic, we've enhanced our co-branded consumer credit card with our new partner, Banco Santa Cruz, which launched in November 2025. This new agreement offers 6% cash back at PriceSmart Clubs, adding even more value for our members in that market. We continue to invest in omnichannel capabilities to meet our members where they are. In the first quarter, digital channel sales reached $89.8 million, up 29.4% year-over-year, representing 6.6% of total net merchandise sales. This marks our highest digital contribution to date. Orders placed directly through our website or app grew 18.1% with average transaction value up 10.1%. As of November 30, 73% of our members had created an online profile and 27.1% of our membership base has made a purchase on pricesmart.com or our app. We see continued opportunity in this space and we'll keep investing to enhance the digital experience we offer our members. During the first quarter, we began migrating our mobile application to fully native iOS and Android architectures to enhance speed reliability and accessibility. This foundation will allow faster deployment of new features and help us deliver an outstanding member experience in our digital channels. Turning to technology investments that enhance both member and employee experience and operational efficiency. In the first quarter, we completed implementation of our new point-of-sale system, ELERA a Toshiba product in all English-speaking Caribbean markets. Later in fiscal year 2026, we will begin rolling out this system in our Spanish-speaking markets. ELERA will help us achieve faster checkout times, improve productivity and expand payment options among other benefits. Also, in the first quarter, we began implementing Workday's human capital management system to replace legacy HR applications. This upgrade is designed to enhance the employee experience with modern, user-friendly tools while improving processes and strengthening compliance. Additionally, the platform will provide scalable, integrated data to support our future growth. Before I turn it over to Gualberto, I want to address a few additional topics. First, regarding U.S. tariffs. Approximately half of the merchandise we sell is sourced locally and regionally within Latin America. The other half is sourced from the U.S., Europe, China and globally. While we consolidate many of these products through our Miami distribution center, they are shipped in bond and are not nationalized in the United States. We also take advantage of free trade agreements where we can. Additionally, we've been leveraging our expanding distribution center network and China consolidation capabilities to shift direct to market where feasible, further optimizing our supply chain. As a result, U.S. import tariffs do not apply to most of our merchandise. We continue to monitor the evolving trade policy environment, but to date, current U.S. tariff policy has not impacted our cost structure or business operations. We are also monitoring remittance flows to Latin America and the Caribbean. Remittances represent a significant portion of GDP in several of our markets. including Jamaica, Honduras, El Salvador, Guatemala and Nicaragua. While there has been reporting on changing remittance patterns from the U.S. to the region, to date, we have not seen changes in consumer demand or purchasing behavior in our clubs. We continue to watch this factory closely given its importance to the economies we serve. In addition, over the weekend, there was major news out of Venezuela. We are alert and monitoring the situation closely. It's still very early to understand how this will evolve or what the implications might be for our business or for U.S. companies operating in the region. And lastly, I want to provide a preview of our holiday season performance. Comparable net merchandise sales for the 9-week period ended December 28, 2025, grew 7.1% in U.S. dollars and 5.4% in constant currency. This represents solid performance as we continue to comp against increasingly strong prior year periods, though it does reflect the deceleration from our first quarter's growth rate. December specifically was impacted by several transitory factors. Government elections in Honduras created consumer uncertainty. Panama's extended rainy season disrupted both traffic and logistics and supply chain timing issues created out of stocks in several high-volume food items, a situation we identified and are addressing. Looking forward, we are encouraged by what we are seeing. Colombia continues to deliver strong momentum, and we are seeing positive trends across many of our markets as we enter calendar 2026. With that, I'll turn it over to Gualberto to walk you through the financial details. Gualberto Hernandez: Thank you, David. Continuing with the income statement. Total gross margin for the quarter as a percentage of net merchandise sales remained strong and unchanged at 15.9% versus Q1 last year. Total revenue margins improved 30 basis points to 17.7% of total revenue from 17.4% in the same period last year. This was mainly driven by the good results in membership renewals and Platinum growth, as mentioned before, by David. On overhead costs, Total SG&A expenses increased to 13.1% of total revenues for the first quarter of fiscal year 2026 compared to 12.8% for the first quarter of fiscal year 2025. The 30 basis point increase is primarily related to our continued investments in technology and to the compensation of our Chief Executive Officer. During his tenure as our interim Chief Executive Officer from February 2023 to August 2025, Robert Price declined any compensation for his services. Operating income for the first quarter of fiscal year 2026 increased 8% from the same period last year to $62.9 million. Below the operating income line, in the first quarter of fiscal year 2026 we recorded a $7.2 million net loss in total other expense, almost unchanged from $7.3 million net loss in total other expense in the same period last year. The primary cause of our net loss in total other expense is due to foreign currency-related losses. In terms of income tax, our effective tax rate for the first quarter of fiscal year 2026 came in at 27.9% versus 26.5% a year ago. Primarily, due to nonrecurring items such as the tax contingency approval and foreign exchange rate fluctuations. Finally, net income for the first quarter of fiscal year 2026 was $40.2 million or $1.29 per diluted share, up from $37.4 million or $1.21 per diluted share in the first quarter of fiscal year 2025. Adjusted EBITDA for the first quarter of fiscal year 2026 was $86.9 million, compared to $79.1 million in the same period last year, a growth of 9.8%. Moving on to our balance sheet. We ended the quarter with cash, cash equivalents and restricted cash totaling $249.6 million, plus approximately $114.2 million of short-term investments, typically held in certificates of deposit. When reviewing our cash balances, it is important to note that as of November 30, 2025, we had $80.2 million of cash, cash equivalents and short-term investments denominated in local currency in Trinidad which we could not really convert into U.S. dollars. Turning to cash flow. Net cash provided by operating activities reached $71.2 million for the first 3 months of fiscal year 2026, an increase of $32.7 million versus the prior year period. The increase is primarily due to $18.7 million of overall net positive changes in our previous operating assets and liabilities mainly due to recoveries in our VAT receivables and increases in accrued Platinum rewards as well as improvements in working capital that contributed $10 million to the overall increase. Net cash used in investing activities increased by $61 million for the first 3 months of fiscal year 2026 compared to the prior year, primarily due to a net increase in purchases less proceeds of short-term investments of $39.8 million, an $11.9 million increase in purchases of long-term investments and a $10.4 million increase in property and equipment expenditures to support growth of our real estate footprint compared to the same 3-month period a year ago. Net cash used in financing activities in the first 3 months of fiscal year 2026 remained relatively flat compared to the same period a year ago. In closing, we're pleased with our start to fiscal year 2026 and the momentum we're building. The investments we're making in real estate, supply chain infrastructure and technology are positioning us for sustained growth. Combined with our team's exceptional execution, we're confident in our ability to continue delivering value to our members and driving long-term performance. I will now turn the call over to the operator to take your questions. Operator, you may now start taking our callers' questions. Operator: [Operator Instructions] Your first question comes from the line of Jon Braatz with Oppenheimer. Jonathan Braatz: A couple of questions. David, when you spoke a little bit about the December comps. You mentioned some issues in Honduras and Panama in the supply chain. Specifically, when you look at Honduras and Panama, were the comps positive despite these issues in the month of December? David Price: We usually don't share that level of detail, Jon, in terms of country by country, so I want to make sure I'm consistent. But in Honduras with the election, there was some front-loading of purchasing in November leading up to the election, and we've seen a good recovery now that there's been an outcome of the election and a definitive President. And in Panama, we're well into the dry season and seeing okay results there as well. But I can't share that level of granularity with you. Jonathan Braatz: Okay. So those -- basically, those issues that you saw are behind you at this point? David Price: Yes. Jonathan Braatz: Okay. Okay. Good. And can you speak a little bit about Colombia. Colombia has been very strong for the last year, maybe even more than a year, comps have been well into the double-digit area. Anything you can put your finger on as to the strength there? David Price: Sure. Thanks for the question. So a couple of different things. I mean, both kind of internal and external factors, starting with the external, I think that the strength of the peso certainly helps. The merchandise mix there, we have more local items than in other markets. But the -- when things are -- when we're under COP 4,000 to $1 on the peso, that definitely helps not only purchasing power but also consumer sentiment. I think confidence in the market from the consumer standpoint. In addition, I have to just give credit to the team. We have an excellent team, both in buying and operations there, and it's really -- there's some great items coming out of Colombia, even some that we're starting to export to other markets. So the item development, both locally and then in terms of the imports also is driving nice differentiation. Jonathan Braatz: I know it's -- you spoke a little bit about the issues in Venezuela. And are there -- what kind of problems might Colombia face if there is sort of a migration and from Venezuela -- additional migrations from Venezuela to Colombia, does that put economic pressure? What kind of economic pressure might that place on Colombia? David? Operator: Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the call will resume momentarily. Thank you for your patience. [Technical Difficulty] Mr. Braatz , your line is open. Jonathan Braatz: David, I was just going to ask you all the issues that we're seeing in Venezuela. Could some of -- could there be pressure on the Colombian economy if there's more migration of people from Venezuela to Colombia. Can that put any pressure on the economy?. David Price: It's -- I don't want to speculate, Jon. The diaspora has been going on for a long time. And there's been Venezuelan migration all over the region. And so I want to be careful not to speculate on something I really don't have any data to share on. But from what we're seeing, consumer demand is strong in Colombia, and we have a good brand position. Jonathan Braatz: Okay. And 1 last question. If I saw it correctly, at the end of fiscal 2025 you had about USD 60 million in Colombia -- in Trinidad. And at the end of the first quarter, you have $80 million. why the increase from $60 million to $80 million in the first quarter? Gualberto Hernandez: Jon, this is Gualberto. Thank you for the question. Trinidad, as you know, is something we're looking careful and there is a lot of fluctuations in the availability of U.S. dollars. There is no specific reason. It's a little bit of high season now after Christmas. So there is more cash on our side. And it's a bit more difficult to cover everything. But we don't see any material changes in the conditions there. It continues to be difficult, I wouldn't say it's more difficult than before, and it just fluctuates depending on the availability of dollars, as you know, in the market in every month. Nothing in particular to highlight there. Operator: Your next question comes from the line of Hector Maya with Scotiabank. Héctor Maya López: On Chile, very quick, it is really nice to hear that you are moving quick on certain important steps, usually, permits tend to be -- tend to take a bit of time. So that is nice to hear. But what have you learned so far from the market or potential competition, and are there any surprises or takeaways or things that you are not expecting maybe in Chile? And on Colombia, with a good momentum there, how sustainable do you think is the revenue growth that we are seeing in the country? And how concerned are you about the minimum wage hikes in the country? Or what effect do you expect from that? David Price: Okay. Let me take the first 1 with Chile. I wouldn't say there's anything necessarily that has surprised us. But I will say, Chile, of course, is a very competitive market and highly digitalized with a high expectation from the consumer. It's also very open from the standpoint of free trade agreements. And so there are a lot of imports as well. There are no club models in Chile. There are Mayorista models, as you know, that are kind of more like the Atacadao kind of Brazil type wholesale model, but nobody doing what we do. So we operate in other competitive markets, and so we feel optimistic. And in terms of Colombia, in terms of minimum wage. I don't want to comment on -- in terms of -- there's a sovereign country making its own policy decisions, but we don't have any sort of issue there because we aim to pay a living wage in every market and pay above minimum wage, where that doesn't align with the living wage. And so that's kind of our approach, and we want to be -- have our pay and compensation benefits be 1 of the differentiators from the standpoint of who we employ. I mean that's a really important part of our philosophy as a business being an employer of choice. And so I don't anticipate any issue in Colombia as a result of that. And in terms of future looking, I can't comment on future growth. But as I mentioned to John, we're feeling confident in terms of our results in Colombia and the brand position in the market as well as our product mix and what we're able to offer. Gualberto Hernandez: Absolutely. I mean to complement that, our operations in Colombia and growing more and more efficient. So we're confident on our abilities to be successful and to have the right to win in the market. But as you, of course, understand there are a lot of macroeconomic and political elements that we don't control. Héctor Maya López: Excellent, excellent to hear. Also on warehouse and parking expansions and remodeling just how much opportunity or boost in operations are you expecting from this by country or by region? And where do you see the most potential here? David Price: Well, I can't share by region or by country or club, but I can tell you that when we do warehouse expansions, remodels or parking expansions, it helps on several fronts. I mean, first and foremost, it's helping our members. In the case of the parking, we have the good problem of having busy locations. And so when we offer more parking, it helps our members get in and out quicker, but also enables us if there's better flow to turn spaces a little faster, which can help. And then in terms of the sales floor, it helps from an efficiency standpoint, and then, of course, also in terms of selling pilot positions, which is helpful as well, both in terms of items, but also in terms of show stock and availability on the floor. So I can't mention beyond that but there are various factors that drive where we select to do this and also how it impacts. And so far, we've been happy with the results where we pursued remodels and the parking lot expansions Héctor Maya López: Perfect. Congratulations. Operator: That concludes our question-and-answer session. I will now turn the call back over to Gualberto Hernandez for closing remarks. Gualberto Hernandez: Thank you, operator, and thank you, everybody, for joining the call today. Happy New Year to everybody, and looking forward to our next call. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, and welcome to the Greenbrier Companies First Quarter 2026 Earnings Conference Call. Following today's presentation, we will conduct a question and answer session. Until that time, all lines will be in a listen only mode. At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President of Financial Operations, the Americas. Mr. Roberts, you may begin. Justin Roberts: Thank you, Gary. Good afternoon, everyone, and welcome to our first quarter of fiscal 2026 conference call. Today, I am joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's Q1 performance and our outlook for fiscal '26, we will open the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication transactions. Before I turn the call over to Lorie, I would like to take a moment and introduce Travis Williams, Greenbrier's new Head of Investor Relations. Travis joined Greenbrier this week to lead the IR function. His background includes buy-side and sell-side analyst experience and most recently he led the IR function in-house at a publicly traded industrial tool manufacturing company. Please join me in welcoming him. Travis Williams: Thanks, Justin. Excited to be on board. Lorie Leeson: Welcome, Travis, and thank you, Justin, and good afternoon, everyone. Appreciate you guys joining us today. Greenbrier delivered good first quarter performance, exhibiting our disciplined execution and the resilience of our business. Our results demonstrate the strength of our integrated manufacturing and leasing model, continued progress on operating efficiency initiatives and determined action on the things we can control. As a result, meaningful earnings, strong liquidity and progress on our long-term strategic priorities were highlights in Q1. Our model is designed to outperform during a business environment like the current one, and our model delivered, producing what we describe as higher lows through the cycle and as reflected in our 15% aggregate gross margin this quarter. Customers across North America and Europe are circumspect about capital investments as they evaluate current freight volumes, ongoing trade policy considerations and improving rail service that has increased railroad velocity, reducing the near-term pressure for new rolling stock. These conditions impact the timing of new railcar orders, but do not change the underlying long-term replacement demand. In this environment, execution matters and Greenbrier's commercial team continues to perform well. We are competing effectively and securing high-quality orders despite intense competition. As the quarter progressed, order momentum improved, reinforcing our confidence in the durability of customer demand. Brian will provide more details in a few minutes. Trade and tariff policy remains an important consideration for our customers and the industry. While policy considerations influence the timing of customer decisions, it does not change the long-term fundamentals of the railcar replacement cycle or Greenbrier's competitive position. We stay engaged with customers and industry stakeholders and are winning business in this evolving landscape. Operationally, we're taking proactive steps to align our manufacturing footprint with current demand levels while continuing to invest in efficiency, cost discipline and process improvement. Production rates moderated slightly, and we adjusted headcount accordingly, primarily in Mexico, which allowed us to intensify our focus on overhead optimization and operational excellence. These actions are structural and position Greenbrier to respond quickly and profitably as the market evolves. In Europe, market conditions remain complex and performance was affected by operating inefficiencies as we continue to execute restructuring and rightsizing initiatives. We're confident that these actions will strengthen our European platform over time and drive improved competitiveness and profitability. Brazil continues to provide diversification within our portfolio. Economic conditions there remain relatively stable, customer engagement is steady and our operations delivered consistent performance. Our leasing and fleet management business continues to provide stability and growth. As we continue disciplined fleet construction and management, this business remains an important source of recurring earnings and through-cycle resilience. Turning briefly to capital allocation. Our priorities remain unchanged. We continue to deploy capital where returns are strongest maintain balance sheet strength and liquidity and return capital to shareholders. We opportunistically sold railcars from the fleet at attractive values, recycling capital, while contributing meaningfully to earnings and cash flow. Looking ahead, we are reiterating our fiscal 2026 guidance. And while near-term market conditions remain varied, our outlook reflects the improved foundation of our business, disciplined execution and the flexibility built into our operating model. We remain confident in our ability to navigate current conditions and position Greenbrier for long-term value creation. In closing, I want to recognize our employees for their continued focus, flexibility and commitment. Periods like this demand discipline and teamwork, and I'm proud of how the Greenbrier team continues to execute. Our integrated model, strong liquidity position and experienced leadership team position us well to manage the current environment and to capitalize as markets recover. And with that, I'll turn the call over to Brian, who will walk through our operational performance in more detail. Brian Comstock: Thank you, Lorie, and good afternoon, everyone. I'll briefly cover our operating performance for Q1, including orders and business activity in our manufacturing, leasing and management services units. Commercial activity strengthened late in the quarter, and we converted that into diversified high-quality orders in a competitive market. We remain focused on order quality and backlog mix prioritizing opportunities, where we offer differentiated value and can achieve attractive returns. We received global orders for approximately 3,700 railcars valued at roughly $550 million. Orders were diversified across regions and car types, led by tank cars and covered hoppers. Included in this figure were several specialty railcar orders with higher average selling prices, reflecting our ability to support complex and unique customer requirements. Backlog value was relatively unchanged. And we ended the quarter with a backlog of approximately 16,300 units valued at about $2.2 billion. As always, we remain focused on order quality and mix to support efficient production scheduling and attractive margins. Turning to manufacturing. We continue to proactively align production levels with current demand conditions and expect to modestly adjust rates further in the second quarter. Headcount reductions continued across North American manufacturing, primarily in Mexico, reflecting disciplined workforce alignment. Our management team is experienced and agile, and we continue to manage the business to efficiently navigate the current demand environment. At the same time, we are using this period to achieve greater structural efficiency and cost discipline. Overhead optimization initiatives continue to gain traction with teams identifying opportunities to streamline processes, reduce fixed costs and improve productivity. These efforts position our manufacturing platform to scale efficiently as demand recovers. The lease fleet performed at a high level with utilization nearly 98% strong retention and improving economics on renewals. The size of the fleet remained relatively stable as we recycled capital through opportunistic asset sales in a strong secondary market. We also optimized fleet mix, both in terms of credit quality and car tech composition. We expanded the use of Greenbrier's maintenance network for our lease fleet and drove other enhancements to the customer experience. Combined, these efforts support consistent execution and position the leasing business to continue contributing meaningfully through the cycle. In summary, our teams executed well in Q1. We aligned production with demand advanced efficiency initiatives, strengthened our backlog and continue to grow and optimize our leasing platform. These actions reinforce the durability of our operating model and position Greenbrier to navigate current conditions, while remaining well prepared for future market expansion. And with that, I'll turn the call over to Michael to discuss our financial results. Michael Donfris: Thank you, Brian. Revenue for Q1 was $706 million, essentially in line with expectations. Aggregate gross margin of 15% reflects lower production rates and deliveries in Q4, partially offset by continued strong margins in leasing and fleet management and disciplined execution across the broader manufacturing platform. Selling and administrative expenses were $11 million less than Q4 totaling $60 million. This was driven primarily by lower employee-related expenses. And in addition, Q4 included $3.1 million in European footprint rationalization costs. Operating income was $61 million, approximately 9% of revenue. Diluted EPS was $1.14 and EBITDA for the quarter was $98 million or 14% of revenue, representing a strong result and reflecting the benefits of disciplined execution, selectively recycling capital through fleet sales in a strong used equipment market and growing contribution from our leasing platform. For the 12 months ending November 30, 2025, our return on invested capital was 10% and continues to be within our 2026 target of 10% to 14%. As noted in our earnings release, effective September 1, 2025, we changed the methodology for allocating syndication activity, resulting in syndication activity being reflected in the manufacturing segment instead of leasing and fleet management segment. This change has no impact on consolidated results. Turning to the balance sheet. Greenbrier's Q1 liquidity has -- was the highest in the 20 quarters at over $895 million, consisting of more than $300 million in cash on hand and $535 million in available borrowing capacity. We generated $76 million in operating cash flow for the quarter, supported by solid earnings, proceeds from fleet sales and favorable working capital movements. Liquidity remains robust, reflecting disciplined execution, ongoing working capital management and a well-structured capital base. Now switching to capital allocation. We remain committed to responsibly returning capital to our shareholders through a combination of dividends and stock buybacks. Greenbrier's Board of Directors declared a dividend of $0.32 per share, this is our 47th consecutive quarterly dividend and reflects our confidence in the business. Additionally, during the first quarter, we repurchased about $13 million of common stock under our existing authorization. As of quarter end, approximately $65 million is available for future repurchases. We will continue to access this capacity opportunistically consistent with marketing conditions and our broader capital allocation framework. Now turning to guidance. We are reiterating our operating guidance and updating capital expenditure guidance for fiscal 2026. Our focus remains on driving profitability through operational efficiency increased recurring revenue and disciplined capital use. With our resilient business model and strong balance sheet, we are well positioned for continued performance and long-term value creation. Our guidance for fiscal 2026 is as follows: new railcar deliveries of 17,500 to 20,500 units, including approximately 1,500 units in our Greenbrier-Maxion Brazil. Revenue between $2.7 billion to $3.2 billion. Aggregate gross margin of 16% to 16.5%, operating margin between 9% and 9.5% and earnings per share of $3.75 to $4.75. Greenbrier's capital expenditures and manufacturing are projected to be approximately $80 million. And gross investment in leasing and fleet management will be roughly $205 million. Proceeds from equipment sales are expected to be around $165 million. I will point out, we are pursuing assets in the used equipment market in an opportunistic, disciplined manner and may end up at a higher investment level. Greenbrier delivered good financial performance in the first quarter and maintained a strong balance sheet and liquidity position. Our integrated business model, disciplined capital allocation and focus on execution position us well to navigate throughout the cycle and create long-term shareholder value. With that, we'll open the call for questions. Operator: [Operator Instructions] Our first question is from Andrzej Tomczyk with Goldman Sachs. Andrzej Tomczyk: Happy New Year. I wanted to start on the manufacturing deliveries and maybe we're just curious, if you could talk a little bit more detail on what visibility you currently have into the second half of this year as far as year-over-year delivery growth and when you might expect to see that? And then maybe just what's driving that between Europe and North America? Justin Roberts: Yes, Andrzej, it's good to hear from me. Hope you had a good holiday. This is Justin. Yes, we've got pretty good visibility with, I would say, most of our open space, as historically, we see it as in the summertime, so kind of the June, July, August time period. But leading into that, we do have pretty good visibility. And I think, I would say that we do see some opportunities for year-over-year growth in that time period, since we were kind of ramping down production last summer, and we'll be increasing production heading into our next fiscal year. Andrzej Tomczyk: Got it. That's helpful. And I know it's very early here, but I was just curious, given the recent news and events Greenbrier's thinking on maybe the potential medium- to longer-term impacts related to Venezuela any indirect or direct impacts on your manufacturing business that we should consider maybe that you guys have thought through? Brian Comstock: Andrzej, this is Brian. We don't see any impacts at all at this point from Venezuela. There's no -- there's no lap between what we do in Brazil or other areas. And so quite frankly, we don't think for our business, it will be impactful. Justin Roberts: And maybe longer term, Andrzej? I would say, broadly, a lot of -- if there is going to be additional kind of oil activity, it will be typically handled via pipeline typically. And any oil over -- via tank cars is going to be more of a short-term phenomenon. Andrzej Tomczyk: Okay. That's helpful. Maybe 1 more for me on manufacturing and then delivery environment. I'm curious as we sit here today, if you're seeing any incremental improvement or changes in the tenor of customer ordering behavior into December and January? And maybe in that same context, would you expect sequentially or what would you expect, I guess, sequentially in terms of deliveries 1Q to 2Q as well as the margin expectations throughout the year relative to the 11% you guys just did? Brian Comstock: Yes. I'll take the first part of that, and I think, Michael, you take the second part. From a customer perspective, I think in our scripts, we talked about how the order activity towards the end of Q3 had picked up and we're continuing to see that our Q4, and we're continuing to see that activity into Q1. December was unusually high for that period. It's typically a slower month. And we had a nice number of diverse deliveries come in, in December. So we're seeing it continue to tick up. Justin Roberts: Right. And I'll take the margin question. As we look across the year, we continued our guidance in aggregate gross margin. And we do see some variability quarter-to-quarter in margin, but we are looking at a stronger back half of the year versus the first half of the year. Andrzej Tomczyk: Got it. That's helpful. Maybe just shifting a little bit to the leasing side of your business. Are you able to share how lease rates trended sequentially 4Q to 1Q? And maybe also just remind us how much of your lease book is up for renewal this year? Justin Roberts: Yes. So I would say for the lease rates they've been, especially for more of the, I would say, specialty cars like tank cars lease rates on an absolute basis have been relatively stable. We continue to see strong renewal activity. And then on the more commoditized cars, lease rates have been pressured some for us, it's about maintaining our focus on discipline around pricing and returns focused. Then with regard -- go ahead. Brian Comstock: Yes. And I would add -- this is Brian, Andrzej. I would add that year-over-year renewals, we're still seeing double-digit increases on the renewal side. Justin is correct that we're seeing rates hold. But keep in mind, some of these renewals were done 4 or 5 years ago. And so we continue to see nice uplift in our renewals that are coming up as well. Lorie Leeson: And I'll just jump in as well to say that when we see more moderated demand for new builds, current market, that means the existing equipment becomes more valuable, more desire. So that's another thing that's adding to those renewal rates. Justin Roberts: And then on the kind of the cars in the fleet to be kind of renewed overall, we had about 1,500, 1,800 up for renewal as we entered the fiscal year in September, and we've successfully renewed kind of around 35% of that. So we're continuing to trend in the right direction there and feel pretty positive about the rest of the fiscal year. Andrzej Tomczyk: Understood. And then I guess just on the first quarter, there was the large gain, I think, $18 million roughly was more than you did in the entire year last year. Was curious what we should be thinking in terms of full year gains this year or maybe relative to the first quarter levels, if you could provide that? Brian Comstock: Yes. We did have an opportunistic gain in the first quarter, looking at the market. And we continue to look at that as the year progresses, we're really excited in terms of what that could do for us this year. Lorie Leeson: I guess, I'd just throw in that we're active in the secondary market, whether it's from trying to look for assets to add to our owned lease fleet that we want to grow, but also to take advantage, if there's something that's very accretive to our return on those investments. Justin Roberts: And Andrew, maybe just to take a step back and you think about, as you are managing a leasing business. Part of this is you're always taking a look at your portfolio concentrations, your build-out and things like that and really taking a look at, okay, so where do we maybe have a little exposure, what do we have in our backlog that we're building out and bringing it into the fleet. And so there's kind of this constant active management of the portfolio itself. And than when you're able to decide to sell assets and generate gains, you have an assumption around that. But sometimes markets give you a little more than what you expect. And sometimes, they don't give you as much as what you expect. But this quarter, we were pleased with where that laid out. Andrzej Tomczyk: Very clear. And maybe just as a follow-up on the leasing fleet itself and growth expectations. Should we expect maybe like high single digits? Or can you comment on the type of fleet growth that you guys expect this year in terms of the lease fleet? I think you did close to double-digit growth in 2025 and mid-teens in 2024 as you guys have pushed more into leasing. So I'm just curious what trajectory we should be thinking about over the near term, would be very helpful. Justin Roberts: Yes. I mean I think we would say that we're not going to give an explicit number because this is still a very active environment. But we do believe that we will grow this year probably in the single-digit range, maybe a little higher. It kind of depends on how a few different opportunities manifest. But ultimately, we are committed to growing the leasing business and kind of thinking about this from the long-term shareholder value perspective. Andrzej Tomczyk: Understood. And maybe just to close out for me to sort of higher level questions. On the tariff front, would you say that those are ultimately an incremental positive or negative to your business? And then the same question also goes for the potential for Class 1 rail consolidation. With Greenbrier be a proponent of rail mergers? Or would you rather sort of the merger not go through? Lorie Leeson: Sure. And I'll launch into these, and I'm sure that my colleagues will jump in and help out. When it comes to tariffs, I will say that thus far, it's been neutral to our financial performance, although the uncertainty created by the changing landscape in tariffs definitely has been a headwind or has our customers take a pause on committing additional capital for new railcars. So that has been an impact as well where there are tariffs on foreign sourced materials, it allows U.S. sourced materials to have higher prices. So that also has resulted in, I would say, a bit higher prices right now for railcars, which are primarily utilizing steel. So that can also be a consideration when you're thinking about an investment. So overall, I would say the dollar or percentage amount of tariffs has not had a tremendous impact. It's more the uncertainty to try to understand the operating environment and what those tariffs might do to supply chains and logistics as our customers are looking at where they're sourcing their materials and where their finished goods going to go and how are they going to be transported. That said, and Brian is shaking his head, so I'm saying I'm going to get this right. I think that most of our customers are coming to terms with the fact that we're just going to all have to live in a slightly more uncertain world. And we just have to get after running our business, and that's what we do day in and day out as deal with whatever is coming up and deal with that. Anything that you would change... Brian Comstock: No, I think you nailed it, Lorie, it's really at the end of the day, we've had no financial impact from tariffs, but it does continue to weigh on customers' minds and has been a little seized up, although pent-up demand. We're starting to see that release as we said, towards the end of the last Q and end of the first part of this Q. We're already seeing that start to release a little bit. So we're starting to find that equilibrium, I believe, between that pent-up demand and the tariff challenges. Lorie Leeson: Super. And then when it comes to railroad mergers, I try to stay really consistent with my message, which is anything that makes our industry stronger I am a proponent of. Anything that helps to increase the shift of transportation of goods off of highways and on to the rails. I think, is good for our business. So whatever it takes to make our industry a more efficient circulatory system for the U.S. economy. I am in favor of. I've been in this business long enough. I've seen a few of these mergers. They can be bumpy at times. And I'm sure the STB will go through an appropriate process to review it, and we will all just take it 1 day at a time. Operator: The next question is from Bascome Majors with Susquehanna. Bascome Majors: Maybe just to follow-up on some of the geopolitical angles that we closed with in the prior session here. The USMCA, how engaged are your people or industry organizations or internal or external obvious in that effort as that review comes closer and what are you hearing as far as how that may play out? And how do you feel about the exemptions that have been favorable for the no tariff impact on the railcars existing into 2027 and beyond. Lorie Leeson: Bascome, thank you for that question. I strongly am supportive of USMCA. I do believe, as I was saying that the rail network is a circulatory system of the U.S. economy, and I think the free flow of railcars across our border to the north and south is very critical, not just for the rail industry, but for the overall economy. So just like with everything and maybe as we each get a little bit older, we can look back in the past and say there might be opportunities to refine things and do things a little bit better. I think that we could all try to have continuous improvement as part of our vocabulary. But I don't think it needs to be totally upside down and redone. I think it's been working really nicely for a very long time, and I hope that, that's the conclusion that we come to on that. Bascome Majors: And maybe back to the guidance. Just want to follow some of the pacing comments on deliveries earlier. You talked about, I think, 4,500 or so deliveries for this quarter if you include roughly the run rate on Brazil, that would be kind of annualized to the lower end of your guidance. But I think you also talked about maybe taking production down a little bit in the second quarter and then raising it into next year and also mentioned some white space in the summer. So how do I bring all that together? Where do you have visibility to get kind of closer to the midpoint of the production guidance for the year, where do you need orders to come in and fill some of that white space? And how do you feel about inquiry levels and the level of certainty you need to get there? Brian Comstock: Yes. I think I can start out with that, Justin, and then maybe Michael can fill in. From the order perspective, Bascome, that white space is getting filled as we speak. And -- in fact, we're already making plans to ramp the back half of the year to some degree. So some of these head count reductions are temporary in nature, just as we get through the order book and we get to the more robust part of the cycle. So the white space itself is very limited at this stage. And in fact, in some of our more specialty type of cars, we are indeed going through the planning exercise of bringing people back. Justin Roberts: Yes. And I think Bascome, I mean, if you kind of look at basically kind of how Michael laid out the guidance, we do have a more of a ramp in the back half of the year. And I think at this point, we would say we have pretty good visibility on that. It's just a matter of assuming that the inquiries we have continue to translate into orders, which we have seen an improvement in that over the last few months. And then also barring any unforeseen events in the geopolitical front, which I'm not ready to place a bet on, but we do feel pretty good about the trajectory we're on right now. Lorie Leeson: And I'll just throw in on there. As they both said, of having additional order activity that means we're going to be bringing people back. We want to do that in a mindful way. We don't -- we've learned from the past that it's not good to bring back and try to ramp up too quickly, but we try to do that in a very, very mindful way. And I realized Bascome that I didn't answer the second half of your earlier question about engagement in U.S. MCA. And I will say that we at Greenbrier have been very engaged in submitting comments back on the review for USMCA. And I would be -- I will be encouraging all of the rest of the industry participants to get more engaged because it is very important. Bascome Majors: And last 1 for me, and then I'll pass it on. But if we think about the production cadence and rising visibility and to be able to ramp that back up in the second half of the year if the order conversions continue at the pace that's improved recently, is the manufacturing gross margin largely a function of the volume you're pushing through? Are there some issues with mix and pricing where that may not be sort of linear? Justin Roberts: Yes. And I think you've got it, Bascome. I think it's really a combination. It's not necessarily linear. And so there is a mix component to it. But there's also a production component and absorption of fixed costs and all those things combined as we look at the remainder of the year. Bascome Majors: As you do more volume, if you get to that increase in the back half of the year that you're shooting for, do you think that will be a lift on margins? Or is it really just more of a revenue story? Justin Roberts: Yes. No, I do think it will be a lift on margin from where we are right now. Operator: The next question is from Ken Hoexter with Bank of America. Ken Hoexter: So you kept your EPS outlook $3.75 to $4.25, but it looks like you have a $0.55 gain on sale this quarter, the $17.7 million which sounds like, Lorie, you said you're being opportunistic on some asset sales. So are you decreasing your EPS guide for the rest of the year given the gain on sale presumably to this scale was not in your outlook? Or is there something else adjusting in those numbers? Brian Comstock: Yes. Yes. And thank you for the question. Really, that was about a $0.30 impact to our earnings per share as we looked at it. And it is impacted by just when we're looking at the market and how opportunistic it is. So that shifted possibly between quarters as we look at it and that's why we didn't really affect our guidance. Justin Roberts: And 1 thing, just to clarify, I may have misheard Ken, but our EPS guidance is $3.75 to $4.75, which implies a midpoint of $4.25. Ken Hoexter: All right. That's what I meant, I might misread. But the -- so no change to that $3.75, $4.75, $4.25 midpoint despite the gain, does that -- I'm sorry, from that last answer, does that mean you were expecting these gains in your original target? Or is this -- I'm just trying to misinterpret or interpret the commentary. Lorie Leeson: Yes. Yes. So Dan, as we have a growing owned lease fleet and just like you see with other operating lessors, we will take advantage of opportunities within the market. And as we put together our guidance for FY '26, we did assume that we would be doing some transactions that would benefit EPS. Ken Hoexter: Okay. So can we presume then, Lorie, on that answer, then you've pulled forward all that opportunity? Or are there still a lot of opportunity going forward with these large game potential? Lorie Leeson: I would say that timing is difficult to predict. When we have a good transaction as much as we would like to perfectly slot things into each quarter in a lovely even smooth peanut butter way, it doesn't always work that way. And we will close on transactions as they present themselves and as our customers need to close on the transactions. That said, it's a strong market out there. So I'm not saying that we're done on doing transactions. We're looking at stuff that we might sell. We're looking at stuff that we might buy. So it's just going to be part of our business going forward. Ken Hoexter: Okay. And then -- you mentioned in the -- given the backlog, right, if I look at the new -- the cars out of the backlog, the 3,700, $550 million added, that's about $150,000 average ASP, which is up significantly from the [ $125,000 ], but even kind of going back the last few years, I don't know if we've seen a number that high. I think there was commentary in the prepared remarks that there was some higher value cars in there. Can -- is that a couple of cars that are just so highly valued. Can you just maybe walk through, I know, you never break out number of whatever it might be a specific type of tank car or whatever it is. But can you just kind of give us an idea what would drive something so high? Brian Comstock: Yes. Ken, it's Brian. At the end of the day, I don't want to give away too much sensitive information for our competitors. But we do have a number of units that have I'd say, fairly high ASPs. They're specialty cars for specialty type of service. It's 1 of the things that's unique to Greenbrier that we spent a lot of money in the innovation and R&D side of the house to perfect so that we could be in a position like this as markets come to us. And it's a market, I would say that's a growing market that we're looking forward to continuing to build into. Ken Hoexter: Do they have outsized margins? Or just given the components and specialty kind of similar margins to others despite the higher ASP? Brian Comstock: Yes. I prefer not to go into that level of detail. Ken Hoexter: Okay. SG&A jumped up to 8.5% or somewhere around 8%, 8.5%, which was similar to 4Q, but kind of above, I think, the guidance was somewhere in the 7.5ish type range, so maybe an extra $10 million. Is there -- are we -- were there costs added back in? Maybe just walk us through kind of what's going on in SG&A? Justin Roberts: As we set the guidance at the beginning of the year, we did say we're going to take about $30 million out year-over-year and so if I look at sequentially where we ended in the fourth quarter, we came down about $11 million. There's really nothing significant in that as a percent of revenue on calculation that I would look at. We're still targeting taking $30 million out year-over-year. Ken Hoexter: Okay. So was that higher than you would have expected? Justin Roberts: I think we would say the G&A was -- is trending in line with what we expected for the year. Maybe it's up a little bit in the quarter by a few million dollars, but not significantly. Ken Hoexter: So is that -- I'm trying to understand the impact on margins, right? So we're talking about 11% on manufacturing, but then higher SG&A. Was that timed because you added more people or to get more sales just walk us through what's driving that? Justin Roberts: I think the big piece is there's some additional translation and currency adjustments out of Mexico -- or not out of Mexico out of Europe. That, I would say, artificially changed kind of how G&A was tracking. We're not adding people. There's not G&A that is being grown. In fact, I think, if you looked at last year, we tracked -- we ended around $260 million and this year, we're going to be in the kind of $2.25 to $2.30 range is what we're guiding to. So pretty substantial reductions year-over-year. Ken Hoexter: Helpful. And last 1 for me, just is always the below-line stuff, Justin, if you can be any helpful in terms of how we should think about going forward. The minority was a positive versus a negative equity in loss of unconsolidated was negative versus a positive. I don't know, is there any ballpark how we should think about that below the line? Justin Roberts: I think -- probably our activity is -- well, I don't know, maybe we can take that kind of touch base on our follow-up calls. I think broadly, we're expecting to track where we were at in the prior year and kind of based on our preliminary guidance, earnings from unconsolidated affiliates, which is primarily Brazil, is going to be modestly positive throughout the year that would be accretive to earnings. And I'm not saying that to you, I have to say it out loud to myself to make sure I don't get myself confused. The earnings or loss attributable to noncontrolling interest is our partner's share of earnings in Mexico and in Europe, a negative of about -- or an earnings deduction of about $1 million. We do see that fluctuating throughout the year based on cadence of activity in Mexico, in Northern Mexico and in Europe. And that's -- I guess that's about kind of as far as we're going to go at this point. Lorie Leeson: Yes. I would say that if you were to think about where we're doing our operations and not what I still call minority interest piece, it's going to -- if our earnings are and margin are back half weighted, you're going to have a little bit more of that that's going to be going to our partners in the back half of the year. And yes, I think based on our comments, we expect Brazil to remain stable. We're having good performance down there right now. Ken Hoexter: Wonderful. All right. I think that's it for me. It looks like reiterating all your targets, right? So you're -- even with this 4,400, are you still looking for second quarter to decelerate from this fourth quarter? Or do you think we kind of hold -- is this your minimum value in terms of delivery -- quarterly deliveries. Brian Comstock: Yes. We really, really don't really give quarterly guidance. What we are saying though is we do expect the back half of the year to be a little bit stronger than what we're seeing in the first half of the year. So... Lorie Leeson: You can do the math. Brian Comstock: Yes. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Lorie Tekorius for any closing remarks. Lorie Leeson: Thank you, everyone, for your attention and your interest in Greenbrier. We appreciate it. And as always, if you have follow-on questions, I know you can reach out to Justin, but you'll quickly come to know Travis Williams. So we're excited to have and be part of the team. Happy New Year, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll turn the conference over to Joshua Levine, Vice President, Investor Relations and Treasury. Thank you. You may now begin. Joshua Levine: Thank you, operator. Good morning, and welcome to The Simply Good Foods Company's First Quarter Fiscal Year 2026 Earnings Call for the period ended November 29, 2025. Today, Geoff Tanner, President and CEO; and Chris Bealer, CFO, will provide you with an overview of our results, which were provided in our earnings release issued earlier this morning. Our prepared remarks will then be followed by a Q&A session. A copy of the release and accompanying presentation are available on the Investors section of the company's website at thesimplygoodfoodscompany.com. This call is being webcast, and an archive of today's remarks will be made available. During the course of today's call, management will make forward-looking statements, which are subject to various risks and uncertainties that may cause actual results to differ materially. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. On today's call, we will refer to certain non-GAAP financial measures that we believe provide useful information for investors. Due to the company's asset-light business model, we evaluate our performance on an adjusted basis as it relates to EBITDA and diluted EPS. Please refer to today's press release for a reconciliation of our non-GAAP financial measures to their most comparable measures prepared in accordance with GAAP. Finally, all retail takeaway data included in our discussion today, unless otherwise noted, reflects a combination of Sircana's MULO++C (sic) [ MULO+C ] measured channel data, and the company estimates for unmeasured channels for the 13 weeks ended November 30, 2025, as compared to the prior year. I will now turn the call over to Geoff Tanner, President and CEO. Geoff Tanner: Thank you, Josh, and thank you for joining us for our call. I'm pleased with our Q1 performance, and I want to reiterate our confidence in our plan for the balance of the year. As a result, we are reaffirming our full year outlook for net sales and adjusted EBITDA. Consumption in Q1 grew 2%, led by double-digit growth from Quest and OWYN, which combined to generate 71% of our net sales. This was offset by expected declines on Atkins. Quest and OWYN continue to benefit from expanded distribution and marketing with added contribution from recent innovation. Growth was also supported by another robust quarter of the nutritional snacking category, which grew 10%. We are executing well on initiatives to drive the top line and to rebuild our gross margin. Specifically, with respect to our margin, recent pricing actions are now reflected on shelf with elasticities to date, in line with our expectations, albeit data remains limited. Our robust productivity program, which we started 18 months ago is delivering results taking cost out of the system and ensuring we have a multiyear pipeline of initiatives for the future. These gains, which will be easier to see in the second half once we're past the peak levels of inflation, is a testament to the hard work from everyone in our organization, particularly the supply chain and operations team. Finally, we took advantage of the opportunity to extend supply coverage at attractive year-over-year prices on several key inputs, most notably cocoa, where we have now locked in incremental supply at sequentially more favorable level, which will begin to flow into the P&L late in Q4 and into fiscal 2027. We know our results for the first half of this fiscal year for reasons we've discussed previously, are below our longer-term expectations. However, we remain confident that our top and bottom line performance will improve once we get beyond Q2. And as mentioned, we are reaffirming our full year outlook. With this in mind, and with our stock at levels that we believe discounts our long-term growth opportunity, we borrowed an incremental $150 million during the quarter that allowed us to accelerate our share buyback program. Since the start of the year, we have repurchased over 7% of our common stock. And as you saw in our press release today, the Board authorized a $200 million increase to our existing share repurchase program. Our decision to repurchase our stock reflects our continued confidence in our long-term runway, and we expect to continue with this program as long as the opportunity remains attractive. Simply Good Foods is well positioned as a leader in the nutritional snacking category. The growth is being propelled by the mainstreaming of consumer demand for high-protein, low-sugar and low carb product. We have a strong foundation for sustainable top line growth, which coupled with our history of strong margin and a proven track record of successfully converting a significant percentage of adjusted EBITDA into free cash flow, I believe will create shareholder value for the long term. Turning to our brand. Quest had another solid quarter, delivering 12% consumption growth and nearly 10% growth in net sales. Key brand metrics are up nicely. Household penetration reached nearly 20% this quarter, up 200 basis points year-over-year and up 50 basis points versus last quarter, a continuation of sequential momentum we've observed for some time. Our salty snacks business once again performed very well in the quarter, with consumption up 40%, reflecting underlying distribution gains and velocity growth as well as somewhat easier year-ago comp when we were supply constrained. As a result, household penetration for Quest Salty surpassed 10% this quarter, up 220 basis points over the last 12 months. Our Salty innovation strategy has been focused on developing and launching a full suite of exciting flavors, which continue to prove highly incremental. This is enabling us to build a highly visible brand block on shelf that enhances our leadership position. We're also introducing channel-specific packs, helping us attract new households and expand product usage occasions. To put this into perspective, ACV was up nearly 5 points in the quarter versus the prior year, and average items per store were up 34%. With visibility to further distribution gains and strong merchandising ahead, we remain confident and sustained growth for our Salty business. Quest Bars consumption was flat versus the prior year in Q1 with solid results from our Taste Forward Crispy line and new Overload platform. As I've said in the past, reaccelerating growth in our Bar business is a critical imperative with Overload the first step. Beginning in the second half, we expect to benefit from several additional initiatives, which are already underway, including further platform innovation and improved in-store activations and merchandising to drive trial. We are hyper-focused on ensuring strong execution of these initiatives and improving performance in this important segment. Lastly, we continue to see solid performance of our new 45-gram Protein Milkshake, which during the quarter gained an additional 8 ACV points. We are gaining trial-focused placements across the store including a number of new opportunities we've secured at several retailers this winter and spring. In addition, our high protein donut launched this quarter, initially on e-commerce and more recently with a large mass retailer. We expect ACV to ramp in the coming months as more retailers reset their shelves, which will provide us with a better read on performance. As we look ahead in the short term, we have a robust new year new merchandising program in place, including significant off shop displays, both in and outside our aisle. I want to remind you, as we said last quarter, the consumption growth in Q2, will be below the full year outlook in large part due to business with a key club customer shifting from Q2 focus last year to more balanced across the rest of the year. However, we remain confident that the strong in-store activation and trial driving activity will deliver continued household penetration gains, positioning the brand for a strong second half. As a result, Quest remains on track to deliver high single-digit consumption growth consistent with our outlook from last quarter. The brand is our largest and highest-margin business, Retailers view us as the innovation leader in the category, which is why we are benefiting from significant distribution and merchandising gains today with line of sight for further expansion in the spring. Finally, we continue to invest heavily in marketing, brand building and new capacity and production capabilities to support ongoing demand. Shifting to Atkins. Consumption declined 19%, consistent with our outlook. Declines were largely driven by lost distribution at several key retailers, which accounted for 2/3 of the headwind. As we've said previously, we continue to work strategically with our retail partners to find the proper breadth and assortment for the brand and to repurpose space from Atkins tail in favor of incremental gains to more productive Quest and OWYN SKUs, all in an effort to get a core assortment with a clear differentiated position in the category focused around weight. These actions are consistent with our fiscal year outlook for the brand, which continues to call for consumption declines around 20%, driven mostly by distribution losses. Over the last few months, many of our initiatives to modernize the Atkins brand have begun to hit the market. These include introducing a 4-pack within our meal bar portfolio, offering consumers a more attractive entry price point, new packaging across nearly every SKU and updated website and refreshed marketing. Our shift to sharpen our opening price points with a 4-pack and meal bars is doing what was intended with unit velocities on average up high single digits year-over-year, building trial and repeat rates and a 300 basis point increase in the percentage of new buyers added to the brand. As we are only 1 quarter into this initiative, we will continue to assess the benefits of the lower price point versus the overall revenue that the business generates over time. I would highlight that improved brand health, including new buyers and repeat rates is an important series of KPIs we will monitor and consider as we work to stabilize the business. The core promise of Atkins has always been to help consumers reach and maintain their weight goals backed by science and proven results. As we continue to see a segment of consumers turn to GLP-1 drugs to help them with their weight loss, we recently concluded a pilot clinical study to assess the effectiveness of Atkins for consumers using GLP-1 drugs. The study showed several encouraging results, including positive data around muscle mass retention, digestive comfort and certain metabolic markers important to consumers with diabetes. GLP-1 drugs are clearly a game changer for many people and how they lose weight, and we're excited in the coming months to share more information about our research into how Atkins nutritional approach can help these consumers achieve their goals. Moving on. We were pleased to see OWYN's performance in market this quarter with consumption up 18%, benefiting from distribution-led growth for RTDs and powders and an ongoing test in some club stores. Household penetration was up 100 basis points to 4.5%. In the near term, consistent with our outlook from last quarter, we expect Q2 consumption growth to slow somewhat due to the impact of initial elasticities following the recent pricing actions, lapping elevated prior year promotional levels and a lingering impact on velocity from the product issues we talked about on our last call. I'm pleased with our team's effort to address the product quality issues. We've seen our ratings level improve versus the summer, helped by our new and improved formula, which has been shipping since August. But we also know we have work to do to rebuild the quality perception with some consumers. As we look ahead, we remain confident in the brand and we will leverage the full scale and capabilities of Simply Goods to drive growth of the business. This includes leveraging our sales force to fill ACV opportunities, narrowing the gap for leading peers increasing marketing double digits this year with marketing as a percentage of sales expected to exceed 10%. Household penetration is only 4.5% and brand awareness is only 20%, pointing to a significant opportunity for more consumers to discover the brand. And lastly, launching both close-in and platform innovation, building upon the brand's strong position and authenticity in the fast-growing clean label movement. To summarize, with only 1 quarter of the year completed, we are reiterating our full year outlook. We are on track and remain confident in our plan. I want to close by thanking our team. They have attacked marketplace challenges head on with resilience and agility. Our nimble and flexible operating model, short- and long-term growth opportunities for Quest and OWYN and strong margins and balance sheet position us well. We are taking the right actions for the business to enhance our growth vectors and to position the company to win for the long term. I'll now hand the call over to Chris. Christopher Bealer: Thanks, Geoff. Good morning, everyone. Thank you for joining us. Overall, we delivered a solid start to the year relative to our plan with net sales and adjusted EBITDA modestly ahead of our expectations. Quest continued to be the engine of growth on the top and bottom line, most notably in salty snacks with solid execution across the organization as we position the company for improved results in the second half. First quarter reported net sales of $340.2 million were essentially flat versus a year ago. Quest net sales grew nearly 10%, driven by robust consumption growth of 12%, while Atkins and OWYN declined 17% and 3%, respectively. For Atkins, while challenged versus prior year, net sales paced slightly ahead of the expectations we provided last quarter as retailer reductions in trade inventory proved less of a headwind than we had expected. On OWYN, Q1 net sales lagged consumption meaningfully, driven by lingering product quality issues and the related impact on retailer inventory levels, which began the quarter in an elevated position. As we enter New Year New You, inventory balances are now more aligned for shipments to match consumption. Gross profit of $109.9 million declined 15.8% on a reported basis from the year ago period, driven primarily by an elevated inflationary costs, most notably cocoa and our first full quarter of tariffs, which were approximately $4 million. Gross margin was 32.3% on a GAAP basis, a decline of 590 basis points versus prior year, largely reflecting higher input costs and about 120 basis points impact from tariffs, which were only partially offset by productivity and mix. Excluding approximately $2.6 million of onetime OWYN integration expenses in the current period and $1 million of noncash purchase accounting inventory step-up expenses in Q1 of fiscal 2025, gross margin declined 540 basis points to 33.1%. Selling and marketing expenses of $29.7 million declined 10.1% versus prior year, primarily the result of planned pullback in Atkins marketing. Quest and OWYN marketing in aggregate increased nearly 10%. G&A expenses of $38 million were flat year-over-year. Excluding stock-based compensation, onetime integration and other costs, including $2.8 million related to the extension and upsizing of our term loan and revolving credit facilities, G&A declined 4.4% to $28.3 million, driven by cost synergies related to the OWYN acquisition and cost management across the organization. As a result, adjusted EBITDA was $55.6 million, down 20.6% due to the margin pressures I spoke about a moment ago. Net interest expense of $3.8 million was down nearly 50% versus the prior year as a result of lower average debt balances, while the effective tax rate was 25.3%. Net income was $25.3 million, a decline of 34% versus last year due primarily to the aforementioned margin challenges and onetime costs. Diluted earnings per share was $0.26 versus $0.38 in the year ago period. Adjusted diluted earnings per share was $0.39 versus $0.49 in the year ago period. Please note that we calculate adjusted diluted EPS as adjusted EBITDA less interest income, interest expense and income taxes divided by diluted shares outstanding. Moving to the balance sheet and cash flow. As of the end of Q1, the company had cash of $194.1 million and an outstanding principal balance on its term loan of $400 million, bringing our net debt to trailing 12-month adjusted EBITDA to approximately 0.8x. Cash flow from operations of $50.1 million represented an increase from approximately $32 million last year due to improved working capital. Capital expenditures were approximately $2.1 million. Higher cash and debt balances at quarter end reflected the company's strategic decision to borrow an additional $150 million as part of the refinancing and extension of our credit facilities, which closed in November. I would highlight that despite upsizing our credit facility, we were able to maintain a consistent spread over SOFR of our Term Loan B, reflecting the credit market's confidence in our long-term story, our cash flow and our balance sheet today. With the additional liquidity and our stock trading at attractive levels, we aggressively increased our rate of share repurchases since we last spoke with you in October. For Q1, we repurchased 5 million shares for $100 million. And on a fiscal year-to-date basis through January 6, the company has spent nearly $150 million to repurchase more than 7% of the shares outstanding at the beginning of this fiscal year. Finally, as Geoff mentioned, with our prior authorization nearly exhausted and our stock remaining at attractive levels, the Board of Directors recently approved an additional $200 million increase to the company's existing stock repurchase program, building on the $150 million incremental authorization announced last quarter. As of today, the company has approximately $224 million remaining under its current stock repurchase program. At current prices, we see share repurchases as a very attractive use of cash. Moving on to our discussion of our outlook. Reflecting our Q1 results and continued confidence in the return to growth on the top and bottom line in the second half, we are reaffirming our outlook for fiscal year 2026. Specifically, we continue to expect the following: net sales growth is expected to be in the range of negative 2% to positive 2%, with growth from Quest and OWYN offset by Atkins. Gross margins are expected to decline in the range of 100 to 150 basis points and adjusted EBITDA year-over-year is expected to be in the range of negative 4% to positive 1%. This includes increased marketing spend on Quest and OWYN to support growth while focusing on profitability for Atkins. Management is focused on the long-term growth of the total company and we'll look to provide more fuel should we find the opportunities to do so. Following the increase in the company's borrowings and accelerated rate of share repurchases, we are updating our outlook for certain below-the-line items. Net interest expense is now expected to be in the range of $19 million to $21 million, while the weighted average diluted share count is expected to be approximately 96 million shares. Our expected full year effective tax rate remains 25%. As we look at the shape of fiscal year 2026, consistent with what we laid out last quarter, we continue to expect that the second half will be stronger on both the top and bottom line than our first half. Specifically, consistent with our prior outlook, we assume Q2 will be the weakest quarter for consumption and net sales growth versus prior year. While we will see the underlying benefit of recent distribution gains on Quest and OWYN, growth will be muted by a combination of initial price elasticities, lingering impacts from the product quality issues on OWYN and challenging laps for Quest and OWYN, both of which benefited in the prior year from stronger New Year New You merchandising programs. All in, we expect Q2 net sales to decline in the range of 3.5% to 4.5%. Below net sales, we expect to deliver sequential improvement in year-over-year gross margin declines as compared to Q1, with Q2 gross margins down approximately 300 basis points versus prior year, helped by the contribution from pricing and productivity, which we expect will begin to offset headwinds from historically high cocoa prices, recent increases in whey and tariffs. As a result, adjusted EBITDA is now expected to decline double digits, slightly below our previous outlook given the impact of more elevated weight costs than we had previously expected. By the second half, we expect growth to improve meaningfully on both the top and bottom line. Specifically, net sales growth is expected at the higher end of our full year range, benefiting from distribution growth, including some recent wins, normalizing elasticities, lapping the initial impacts from OWYN's product issues and an exciting slate of innovation launches across our brands. On the gross margin line, consistent with our outlook from last quarter, we expect second half levels to be roughly in line with or slightly better than our full year fiscal 2025 gross margin on a GAAP basis. This implies flattish year-over-year gross margins in Q3 before Q4 expansion of nearly 200 basis points on a year-over-year basis. I would also highlight that this reaffirmed outlook includes modest tailwinds towards the end of the year from lower expectations for cocoa costs and tariffs given recently secured supply commitments and announced trade agreements and exemptions. These new benefits will be offset by higher assumptions for why across the year. For adjusted EBITDA, consistent with what we have said last quarter, phasing should generally track the shape of our expectations for gross margins with much stronger results by Q4, which we expect will be our strongest period of profit growth, up double digits year-over-year. We continue to expect capital expenditures to be in the $30 million to $40 million range due mainly to the ongoing previously discussed co-investment with a key co-man partner to support additional capacity in our fast-growing salty snacks business. Finally, I would note that our outlook assumes current economic conditions, consumer purchasing behavior and prevailing tariff rates will remain generally consistent across the company's fiscal year. While our outlook includes a number of important assumptions, there remains several uncertain swing factors outside of our control that could represent risk to our outlook. For a comprehensive summary of our full year outlook, please see Slide 15 in our presentation. Thank you for your time and interest in our company. We are now available to take your questions. Operator: [Operator Instructions] Our first question will come from the line of Peter Grom with UBS. Peter Grom: Happy New Year. So Geoff, I appreciate the commentary on the path forward. But can you maybe just elaborate on the confidence in the back half inflection that's embedded in the guidance and just what remains an uncertain volatile environment for the industry? Maybe where do you have the highest degree of confidence or visibility? Conversely, where -- what do you see as some key risks or launch points? And I guess, as we think about the shape of the year, just given the 1Q and the Q2 guidance, is it playing out as you anticipated? Geoff Tanner: Yes. So it's playing out very much as expected and as we previously communicated, our plan from the start has known about certain first half headwinds, for example, some shifted promotional activity out of first half and second and known about some second half tailwinds, which we communicated on our last call. If I break that down on the top line, as we look to the second half, we have line of sight to new distribution, some wins there, some merchandising gains, particularly on Quest. I'm very pleased with our innovation pipeline that we have that will start shipping in the spring and then through the summer. Atkins will start moving past some of its larger distribution laps, for example, at Club. And we expect, as we normally see, elasticities to burn off from pricing. So on the top line, just listing a few drivers there that underpin our confidence in the second half. On the bottom line, we have line of sight to improved gross margin, underlying profit growth because we mentioned in the script, the -- we'll have the full benefit of pricing. We'll have the full benefit of productivity. I'm very pleased with the productivity progress we've made as an organization, setting us up for a strong second half, but also into '27. And as mentioned, we've taken more favorable positions in cocoa, which has come down materially. So on the top and on the bottom, we certainly have a lot of confidence that we will -- the business will start to inflect through the second half and into '27. Christopher Bealer: And then Peter, it's Chris. I'll just build on Geoff's answer. Consistent with our prior outlook, our EBITDA is generally going to track pretty closely to the gross margin trajectory. Q3 gross margins, for example, will be flattish year-over-year. And Q4 will be the strongest position for us in both gross margin and EBITDA. And EBITDA as an example, we expect it to be up about double digits. And I think importantly, for me, that sets us up nicely for FY '27 on a margin standpoint. Operator: Our next question is from the line of Brian Holland with D.A. Davidson. Brian Holland: I wanted to ask about Quest Bars flat, obviously underperforming vis-a-vis the broader category there. Innovation is contributing nicely. Overload is off to a good start, as you mentioned, et cetera. But obviously also implies then that the core or the legacy SKUs sort of in aggregate are declining. So maybe first question there, just innovation is obviously important. The category thrives off that new product news. So that's important and obviously encouraging that you guys have accelerated that pipeline. But what do we -- what needs to be done on the legacy bar business just given the sheer size and scale, I mean, is this merchandising that we need to increasingly focus on, which I know you've talked about before? Or does there need to be some sort of rightsizing on some of these tail SKUs in that brand? Geoff Tanner: Yes. If you look at Quest Bars in the quarter, Q1, they were flat, but we started a little bit more recently, more recent weeks, which we expected. As we mentioned, lapping some prior year promotional events through New Year, New Year, some shift in timing. And we always see a higher initial impact from pricing, which we took on Quest Bar. So what we're seeing on Quest bar right now is very consistent with what we expected and what we said on the last call. But to your question, we're obviously not happy with flat. That doesn't work. It's unacceptable. We are the leader in the bar segment, and we should be driving it. I think I've talked about this in the past. Over the past year, in response to that, we have developed a comprehensive plan to reaccelerate our bar business, and that includes platform innovation, which you'll see in the spring. It includes additional merchandising and new distribution that we have line of sight to. And additional marketing that we're going to put behind bars. So right now, we're flat. That's unacceptable. To your point, it's a multipronged plan to reaccelerate bars, inclusive of innovation, but also driving our core bar business through merchandising, through distribution and through marketing. Obviously, this is a multiyear plan. It will take time, but I'm very confident in the plan, and you should start to see the impact of that in the results in the second half. Brian Holland: Appreciate the color. And then pivoting over to OWYN briefly. Obviously, there's a lot of noise right now between the increase in marketing spend, working through the product quality issues and that old inventory. But as we start to move forward, you're giving us metrics around brand awareness, household penetration. So maybe a 2-part question here. If I look at the relationship between household penetration, I think, 4.5% branded awareness at -- or aided or I know the awareness at like 20%. Is that the right delta today? Or does that imply better or worse conversion of that awareness than if you compare that against other brands that you've managed? And as we go forward, how should we be judging the step-up in marketing investment and your ability to convert? Is it watching the relationship between household penetration and brand awareness that you're building over time? Geoff Tanner: Yes. That relationship between 20% aided awareness and 4-ish, 4.5% household penetration pretty standard. So what it does point to is the significant upside opportunity we have on this brand. So while the relationship is pretty standard, those numbers are very low. And that really is a key opportunity for us to drive awareness, which is why we've increased marketing substantially, which then should translate into increased household penetration. One of the ways in which we plan to accelerate that in addition to marketing is to expand the footprint of OWYN. So right now, we've got a really good shakes business. We'll continue to drive that. We've got distribution upside. We've got a smallish powders business that's growing 50% plus that we plan to put more effort behind. And then you should expect us to bring platform innovation that will expand the footprint of the brand further. So the key ways to expand household penetration, marketing, which we've increased more than double, innovation to expand the footprint and then continuing to drive our distribution. We see this brand having a tremendous runway where we acquired it's on the leading edge of the clean movement, and we plan to pull all of those levers to drive awareness and drive household penetration. Operator: The next question is from the line of Megan Clapp with Morgan Stanley. Megan Christine Alexander: I wanted to stick with OWYN, if we could. So underlying consumption in the quarter clearly strong, I think a bit better than you had actually laid out when we talked last quarter, talked about kind of the gap and the destock related to some of the quality issues in inventory. I wondered if you could just give a little bit more color on how that kind of came up during the quarter, whether it was driven by one or multiple customers? And then just, Chris, I think you said as you move into the New Year and New You period, you'd expect shipments to better align with consumption. Should we interpret that as there was still maybe a gap at the start of this quarter and it should close as we move through the second quarter? Just trying to kind of understand your level of confidence in consumption, which is clearly strong kind of matching shipments as we move through the balance of the quarter. Geoff Tanner: Yes, I'll start and turn it over to Chris. To your point, we were pleased with how consumption came in, in Q1, led by some distribution gains at mass test and a club customer. RTDs were solid, as I mentioned earlier, previous question. powders growing 50%. And this does underscore the leadership position we have in plant-based and clean label, which grew 20%. In terms of bridging the gap to sales, as Chris mentioned, the primary driver of Q1 was we came in heavier on inventory, and we had some lingering impact from the quality issue. Christopher Bealer: And then Megan, just to build on that, we do believe we're in a better position now in terms of shipping to consumption. As you mentioned in the remarks, the ERP cutover was a big piece of why we were slightly heavy on inventory coming into Q1. We thought that was a prudent action to take to make sure we didn't have any supply disruption. And then obviously, as Jeff mentioned, the lingering effects of the product issues also had an impact on the quarter. So overall, though, in the long run, we do think consumption is the best measure of brand health. And as I said, we think we're set up now in Q2 to be much more -- much closer in terms of shipment to consumption. Megan Christine Alexander: Okay. That's helpful. And then, Chris, just a follow-up, if I could, on the margin. I think you said at the end of your response to Pete's question that you'll be set up nicely in fiscal '27 from a margin standpoint. I guess when we look at the shape of this year, I think you'll end the year and exit kind of in that mid-36% range on the gross margin and understand there can be kind of seasonality and you probably don't want to give fiscal '27 guidance right now, but is that a good jumping off point as we think about fiscal '27, just that exit rate on 4Q, particularly as you talked about some of the favorability you expect from cocoa? Christopher Bealer: Yes. As I talked about, I think, last quarter as well, we do have good line of sight with our supply coverage. And we do obviously know what we paid last year for cocoa and for other commodities, we can see where the prices are. So we feel very confident about our overall gross margin. I think the mid-36s range that you mentioned on Q4 is directionally right. And I think that is, as you said, a good jumping off point for F '27. But clearly, at this point, I'm not going to be guiding on F '27. But all else equal, probably a decent assumption in terms of the starting point for the year. Operator: Our next questions are from the line of Alexia Howard with Bernstein. Alexia Howard: Can I ask about margins? I seem to remember that when you first bought OWYN, it was a pretty low-margin business, but you're obviously in the middle of extracting a lot of cost synergy from that. And I also seem to remember that you commented recently on quite a wide discrepancy between where the Quest margins are and the lower margins for Atkins. And if we look out over the next 18 months, do we see sort of a major ramp on the margin side, both on the gross margin side and on the operating margin side, driven by things like cutting off the tail of unprofitable SKUs and the ongoing cost synergy realization at OWYN, other drivers that you anticipate? I'm really thinking about the gross margin getting back to that sort of 37% territory is there line of sight into that? Christopher Bealer: Thanks, Alexia. Yes, from a margin standpoint, -- in terms of getting back and rebuilding our margins up into that sort of 37-plus range, the biggest drivers really are the pricing and productivity. We know there's a lag. We talked about it last time, pricing productivity lag versus inflation. That lag is going to start to overlap in half 2 of this year. We also, as I said, have good line of sight to cost visibility, both on cocoa and our other commodities. And we do have a nice tailwind coming from cocoa, which will start to kick in, in Q4 of this year, will flow more into F '27. Obviously, as we talked about in the prepared remarks, we do have -- we do see inflation on whey, which is going to offset that to some extent. But those are some pretty big drivers on margin and certainly very much in our control, which makes me very confident on rebuilding our margins. In addition to that, there is the mix impact as we mix out of Atkins, we mix into Quest, that is also obviously going to have a more long-term structural benefit on margins. And then as you mentioned, I think in the question, yes, we did drive some very nice synergies on OWYN as we integrated it. Those are building through this fiscal year. So those are kind of already embedded in that 3 -- mid-36% range for Q4. That's already sort of fully loaded from an OWYN margin standpoint. And then I guess the final piece I would just put on OWYN, as we talked about, as we build scale and we build, as Jeff mentioned, platform innovation, I would hope certainly that those would certainly be accretive to the OWYN margin as a brand. Geoff Tanner: The only build I would have on that is Alexia about 18 months ago, we did put in place a very robust and enhanced productivity program. That took 6 or so months to ramp. But as we sit here today, we have strong visibility based on terrific work from this team and our supply chain team, the R&D team, and that will enable us to continue to support our margin that will allow us to continue to support investment in the business. Operator: Our next question is from the line of Jon Andersen with William Blair. Jon Andersen: Just a couple here. On sales overall flat for the quarter, can you help us a little bit with the composition? How much did pricing help in the first quarter? And how much will pricing -- how much will flow through as we move into the second quarter and second half? And then I had a question -- a second question on Atkins. I think last quarter, you talked about 10% to 15% of the Atkins business being kind of tail, meaning in the bottom quartile of velocities. Is there an update on that? And what I'm really trying to get at is where you think you are kind of in the process of getting to that optimal assortment for that rightsized assortment on Atkins? Christopher Bealer: Jon, I'll take the top line question and maybe Geoff wants to take the Atkins one. Look, for Q1, I think what's important to keep in mind is we had -- yes, we were roughly flat year-over-year, but slightly better than we had anticipated and certainly a little bit better than we guided at the start of the year. Quest and Atkins, we're quite happy with where Q1 landed. Both of them were ahead of expectations. And OWYN, as we talked about, obviously behind for the reasons we've already stated. In terms of composition of that, pricing really was almost 0 benefit in Q1. The effective date on shelf was really towards the very, very end of October. So we had a very small amount flowing into Q1. So really minimal impact in Q1. And it will be closer to sort of low single-digit benefit for balance to grow, which is consistent with what we said last quarter. Geoff Tanner: Yes, I'll take the Atkins question. I think it's important to point out that the majority, 2/3 of the declines we're seeing on Atkins today are driven by lost distribution, particular impact at club, which will be almost fully passed in April. But to your question, Atkins, if you look at the business today, as we said in the past, 75% of Atkins sales today come from SKUs in the top half of category velocity, which, in my experience, is generally considered safe. If you look at just the lowest quartile, 10% to 15%, which typically would be at risk. So no change there. I hope that helps dimensionalize the risk. And we'll say that rather than just lose those SKUs, we believe the right thing to do for the brand, the category and the company is to partner with retailers to drive to an assortment that would include replacing those SKUs with Quest and with OWYN, faster turning SKUs. I think that's the benefit of the category and the company. What I would say is I have been pleased that we've seen more flowback than we had forecasted on Atkins in Q1 where we've lost distribution. So early days there, but the level of flowback we are seeing into the business, I think partially explains why Atkins had a better than forecasted quarter. Operator: The next question come from the line of Matt Smith with Stifel. Matthew Smith: Chris, just a follow-up question on cost visibility and tariff expense. You called out a $4 million headwind from tariffs in the quarter. When would you expect to start to see relief given the revised trade agreements? Should you start to see tariff favorability relative to your previous guidance in the second half of the year? Or does that really start to flow through in fiscal '27? Christopher Bealer: Yes. Thanks, Matt. I think importantly, again, as we look at total cost, and we see that we have good visibility out. We did get a little bit of relief since we set guidance on tariffs with the especially Annex 3 exemptions. And that will start to flow through. It's going to be flowing through really starting in the second half of the year. Again, when you think about cost of inventory and as it flows through our inventory and we ultimately ship it, there is a timing lag. So that will be more of a second half benefit and into next year. Again, I'll just refer back to, yes, we have some tariff benefit coming in, in the second half. We have cocoa benefit that's going to start flowing in Q4. But we do have a new sort of headwind that's come in, which is the way inflation. So all in, not concerned overall on cost, and that's why we haven't changed our gross margin guidance for the year. And actually pretty much right on the same number for Q4 in terms of what we were thinking. But yes, from a tariff standpoint, benefit will start playing in the second half. Matthew Smith: And Geoff, as a follow-up to your commentary on capital allocation, the company has been running as a portfolio of brands for some time, and you've been open to adding brands. But are you seeing a change in the category given the insurgent brand dynamics and competitive activity? Is that impacting your M&A view? And when we think about the share repurchase year-to-date has been fairly aggressive. Are you confident in the current brands that you own supporting your long-term algorithm? Geoff Tanner: That's a good question. So obviously, we haven't changed our framework for capital allocation. Certainly, M&A is something we look at. I think we've got a pretty decent track record with M&A. Right now, as we look at our stock price, which we think is significantly undervalued, we think the right use of cash is to be in there and buying the stock back, given our confidence in the long-term health of the business. But M&A is something that we're always looking at. There are -- as you mentioned, there are targets out there. Obviously, we want to get it at the right price. So we haven't -- that hasn't changed. Our buyback position is opportunistic in a sense and that we view our stock is significantly undervalued, and we think the best use is to go in there and buy it back at these cheap levels. Christopher Bealer: And I would just -- Matt, I'll just build on Geoff's answer that we have a very strong balance sheet. Obviously, we took, I think, advantage of the stock price, and we also took advantage of our refinancing window to increase our debt level a little bit like modestly, still less than a turn at this present time. We project that to still be around a turn by the end of the year. And we use that extra -- those extra funds to accelerate our stock buyback while our stock is cheap. And I think the authorization increase from our Board recently of another $200 million, I think it's just in my mind, reflects our confidence in the long-term strength of our business and long-term strength of our balance sheet. And while we still have attractive share prices, we'll continue to use our cash accordingly. Operator: The next question is from the line of Robert Moskow with TD Cowen. Robert Moskow: I wanted to dig a little deeper into the clinical study that you're conducting on GLP-1 users and you say these are users who are following the Atkins nutritional approach. Can I assume that this means that you followed users who are on the Atkins diet? And if so, what's the next step, Geoff? Like what would you do with the results of this study to help you market the brand? How would you use it to help you retain distribution with retailers? Just a little bit more info on like what you intend to do with the results. Geoff Tanner: Yes. So the role of Atkins has always been to help people lose or maintain weight. And as we saw -- continue to see consumers turn to GLP-1 drugs to help them with this, 2 years ago, so a couple of years ago, we undertook a pilot clinical study to test whether Atkins could be a valuable tool or companion to people on the drug. So we had 2 groups of patients on -- who were taking the drug, one group using the Atkins diet and the other using a more traditional low fat diet. We just got the results back in last month. So it's still very early, but those results were very encouraging. Patients on the Atkins diet have taken the drug, tended to retain more muscle mass, which is a critical issue for people on the drug, tended to experience fewer side effects, few headaches, nausea with gas, and there were some other significant differences on metabolic outcomes, particularly for those with diabetes. But it was a pilot study, but nonetheless, very, very encouraging that Atkins can play an important role with a lot more to learn. What you will start to see, to your point, is us leveraging the study results and our New Year New You media, so starting in the next few weeks, you'll see us start to message around this, start to target around this. And literally, as we speak, because these results are very fresh, our teams are in front of retailers who are also trying to figure out how to meet the needs of GLP-1 patients. So over the next few months, our selling team will be out in front of the trade in front of retailers, talking to them about the results, talking to them about the importance of action. So it's early. It's a pilot study. With that being said, we're very encouraged and you'll start to see us execute against this over the coming months. Operator: The next question is from the line of Steve Powers with Deutsche Bank. Stephen Robert Powers: A couple of questions around planning assumptions, just going back to Quest Salty. The first one is maybe just give us an update. You talked about distribution gains generally in the forecast. Curious as to what your distribution outlook is on Quest Salty specifically? And if there are any gains embedded in the full year outlook, number one. Number two is just more generally on forecasting in that business. I think as I think about it, there are kind of competing factors on the one hand, favorably. I think there's a greater consumer awareness and consumer acceptance of kind of protein-based salty snacks, which is part of credit to your success. On the other hand, that has brought with it increasing competition from other smaller independent brands as well as increasingly from conventional brands looking at the category. So just curious if you step back and think about the -- those dynamics, whether that has changed your approach to forecasting in the salty business. Geoff Tanner: Steve, we could not be more pleased with our salty business, plus 40% in the quarter. Admittedly, we had some easier laps a year ago, but could not be more pleased. The core drivers are innovation. We've got new flavors, new forms, pack sizes, exclusives retailers, which are performing extremely well. We continue to build distribution, gain merchandising, displays across the store, away from home, gym, airports, hotels. And I'm not sure if you've seen our new campaign, but it's pretty heavily weighted towards salty. So those are the key drivers. As we look to the second half, we're very confident in the continued momentum of Salty. We have line of sight to new distribution. We have line of sight to significant merchandising gains. And part of this is because retailers view Salty as highly incremental to the category. And as a result, they're rewarding us with new distribution and new merchandising. So a lot of confidence in the momentum. As we think long term, I do want to remind that Quest is the pioneer of this segment. We built it from the ground up. It's been growing for a year at a high clip, and that reflects that we know we have a superior product. And really importantly, consumers trust Quest and trust our salty business has tremendous authenticity in the space. Salty is a $50 billion category. We only have 10% household penetration. Awareness is still relatively low. I've seen the multiyear pipeline. You should expect us to be looking at other forms of salty. We have no intention of taking our foot off the gas. Obviously, we've been operating under the assumption that competition is coming. The growth, the demand for this product just makes it obvious. But we're highly confident in the strength of our brand, strength of our product, our competitive moat from a supply chain perspective. And both near term and long term, we have tremendous confidence in this business. Christopher Bealer: Just want to add, Steve, to what Geoff said. Look, if you think about Quest as a brand and look at the areas that we're already building strong businesses, I think it's very important for me that Quest as a brand can absolutely play across the entire salty universe. Today, we have a business that's really an enormous chips business, but there's a lot of other areas in salty across the store where I strongly believe that Quest can build a meaningful business. And for that reason, that's one of the reasons we've been resourcing against that, both internally and with our co-manufacturers. Stephen Robert Powers: Yes, very clear. And I know we're late in the call. Just a quick last question for me, if I could. Apologies if I missed it, but just going back to OWYN. You mentioned in the remarks in the slides that if you think about the long-term path to growth that innovation in new categories will play an important role. I'm curious if fiscal '26 is too early to see some of that or if we should expect that as the year progresses? Geoff Tanner: It's a big opportunity for us. One of the -- if you remember, Steve, it's one of the reasons that we cited why we're so excited about OWYN was to be able to combine our very talented R&D organization and let them loose on OWYN. So there's a very strong pipeline. What I'll say is you should expect to see probably the first foray from us, I'd say, certainly this fiscal, we probably put the timing around that. I'm really excited about the opportunity here, yes, significant. Operator: Our final question is from the line of Tyler Prause with Stephens. Tyler Prause: RTD is becoming an increasingly competitive space. How should we think about growth within this part of your portfolio? And is this a unique subcategory where we could see consumption for Quest, OWYN and Atkins all positive this year? Geoff Tanner: No RTD is certainly competitive. It's not surprising. For a while, the category was somewhat supply constrained, I think that limited the extent of competition. Unsurprisingly, you're seeing some new entrants into the category. What I'd point out is the category is still growing 10% plus in RTDs, which is significant. When it comes to our brands, I'll start with OWYN, very uniquely positioned within that category. It's not just another RTD milk shake or chocolate, a strawberry flavor. It is positioned as the leading clean and plant-based proposition in the market, very differentiated and retailers see that, consumers see that. So I feel very confident. This clean movement, I think, is in the early innings, and we intend to write it as the leader. So I think from a perspective, OWYN is very differentiated. We've been very pleased with how Quest has performed in the space. Quest has the highest protein level at 45 grams, phenomenal tasting, which you'd expect from Quest. So a differentiated position there. And Atkins plays a very different job in the category. Atkins is about helping consumers maintain their weight. It's a different job, and I think a differentiated job, particularly when we start to leverage the GLP-1 findings where shakes could be a very important tool to consumers on the drug. So we believe that we have 3 very differentiated position -- differentially positioned brands inside a category that's still robust, still growing double digit. So we have a lot of confidence in the future growth here. Operator: At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to management for closing remarks. Geoff Tanner: I just want to thank everyone for their participation today on today's call. If you have any follow-ups, please feel free to reach out to Josh, and we look forward to speaking with you again on our Q2 call in April. Have a good day. Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.
Operator: Thank you for joining today's conference call to discuss Tilray Brands' financial results for the second quarter fiscal year 2026 ended November 30, 2025. [Operator Instructions] Now I'll turn over the call to Ms. Berrin Noorata, Tilray Brands' Chief Corporate Affairs and Communications Officer. Thank you. You may begin. Berrin Noorata: Thank you, operator, and good afternoon, everyone. By now, you should have access to the earnings press release, which is available on the Investors section of the Tilray Brands website at tilray.com and has been filed with the SEC and SEDAR. Please note that during today's call, we will be referring to various non-GAAP financial measures that can provide useful information for investors. However, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The earnings press release contains a reconciliation of each non-GAAP financial measure to the most comparable measure prepared in accordance with GAAP. In addition, we will be making numerous forward-looking statements during our remarks and in response to your questions. These statements are based on our current expectations and beliefs and involve known and unknown risks and uncertainties, which may prove to be incorrect. Actual results could differ materially from those described in those forward-looking statements. The text in our earnings press release includes many of the risks and uncertainties associated with such forward-looking statements. Today, we will be hearing from key members of our senior leadership team, beginning with Irwin Simon, Chairman and Chief Executive Officer who will provide opening remarks and commentary, followed by Carl Merton, Chief Financial Officer, who will review our financial results for the second quarter of fiscal year 2026. And now I'd like to turn the call over to Tilray Brands' Chairman and CEO, Irwin Simon. Irwin Simon: Thank you very much, Berrin, and good afternoon, everyone, and happy new year. Thank you so much for joining us today. We delivered a strong second quarter marked by record results and a beat against analyst expectations in the face of strong headwinds. We recorded our highest ever Q2 net revenue of $218 million, achieved an adjusted EBITDA of $8.4 million, and a reported reverse stocks with adjusted EPS loss of $0.02, all while generating an adjusted cash operating income of $6 million. More importantly, the quality of our performance continues to improve. Highlights this quarter include a 51% sequential growth in the international cannabis revenue and a meaningful year-over-year improvement in both net income and free cash flow. We also continue to strengthen our balance sheet. We ended the quarter with approximately $292 million in cash and marketable securities and reduced our debt by approximately $4 million during Q2, leading to a strong net cash position exceeding our debt by almost $30 million. In a rapidly evolving global cannabis regulatory environment, particularly in the U.S., our liquidity and balance sheet strength remains a clear strategic advantage. Today, Tilray operates more than 40 brands in more than 20 countries. We are a global leader in cannabis trusted by patients, health care professionals and regulators worldwide. We are the #1 cannabis producer in Canada by revenue, the fourth largest craft beer brewer in the United States and a market leader in branded hemp wellness products across North America, where our high-protein hemp food portfolio holds a nearly 60% market share. Our Q2 results reinforces the momentum we discussed last quarter, improving fundamentals, sharper execution and increasing leverage from our diversified global platform across cannabis, beverage and wellness. Let's turn to our cannabis business, which is strategically positioned for its next phase of growth. While global cannabis markets continue to evolve, we believe the industry remains early in its long-term development cycle. The decision by President Trump to federally reschedule cannabis in the U.S. represents one of the most consequential regulatory shifts that the industry has seen in decades. Thank you, President Trump, if you're listening today. This is a moment Tilray has been preparing for methodically for years. And guess what, we are ready to go. We believe that cannabis rescheduling for Schedule III will lead the U.S. towards a federally compliant medical cannabis brainwork consistent with our other developed international markets, Tilray is positioned to act immediately. We already have the platform, regulatory experience, operating capabilities and leadership team in place with Tilray Medical U.S. to execute responsibly and to scale. Globally, Tilray Medical is expected to generate approximately $150 million in revenue on an annual run rate. We offer over 200 medical cannabis products, serving more than 500,000 registered patients worldwide. We have participated more than 25 medical cannabis studies and clinical trials conducted in the U.S., Canada, Australia, Argentina and across Europe with leading hospitals, physicians addressing conditions such as pediatric epilepsy, cancer-related nausea, PTSD, chronic pain, anxiety, essential tremors, alcohol use disorders, glioblastomas, cannabinoid impairment and driving performance. These initiatives reinforce Tilray's reputation as a science-driven evident-based medical cannabis company and they underscore the trust placed in us by health care professionals, patients and regulators globally. We also possess one of the largest banks of cannabis genetics, which we intend to study in order to support research on the endocannabinoid system and advance medical cannabis science further. Now let's turn to Q2 cannabis performance. Global cannabis revenue increased to $68 million, our high-margin international cannabis business led the growth, increasing 36% year-over-year and 51% substantially to $20 million, marking one of our strongest international quarters to date, and we fully expect this momentum to continue as we expand our global footprint. This performance is particularly notable given ongoing permit challenges, regular transitions in Portugal and Germany and continued price compression, especially in flower. I'd like to acknowledge and thank the international team for their focused execution under these circumstances. I also want to recognize our Canadian cannabis team for their expertise, support and supply contribution. Additionally, I appreciate the cooperation of Infarmed and the Portuguese regulators to facilitating improvements to permitting approval time lines. Looking ahead, Europe, particularly Germany, the U.K. and Poland represents a significant growth opportunity for us. Execution will be driven by operational disciplines, including process improvement, automation, cross-functional coordination and increased utilization at our cultivation facilities in Portugal and Germany and utilizing our Canadian facilities. Tilray operates one of the largest cannabis footprints in Europe which we're continuing to expand and our advantage lies in scale, speed to market data-driven decisions making and experience gained from our Canadian operation. Moving on to Tilray Pharma and our distribution business. As discussed last quarter, we're expanding our pharmacy reach in Germany, utilizing Tilray's Pharma expansive pharmacy network and salespeople and expect to triple our medical cannabis distribution footprint in fiscal 2026. We remain on track to achieve these objectives. In terms of Q2 performance, revenue grew by 26% year-over-year and 15% sequentially to $85 million, making it our biggest quarter ever, while improving our gross margins. The increase in distribution revenue in the period was driven by competitive pricing, portfolio optimization and increased focus on medical device sales. Looking ahead, Tilray Pharma is laser focused on enhancing operational efficiency to support its commercial expansion into 3,000 additional pharmacies through strategic partnerships. As medical cannabis continues to expand globally, Tilray Pharma is positioned to play a significant role in our overall growth by utilizing insights gaining through integrating our medical operations Tilray Pharma aims to strengthen its business value and create new growth opportunities within both the European medical market and the U.S. International markets remain one of Tilray's most compelling long-term growth drivers as we expect market opportunities, revenue, profitability continues to grow. In Canada, our cannabis business continues to reinforce its leadership position. During Q2, our adult-use medical sales channel, net of excise tax, grew to $46 million with recreational cannabis growing 6% in the quarter. Tilray continues to hold a leading market position in dried flower, non-infused pre-rolls, beverages, oils and chocolate edibles. Our disciplined approach to product mix, margin management and premium pricing has supported our strategic reentry into the high-growth segments as vapes and infused pre-rolls with a focus on accretive margins. In Q2, we advanced our innovation pipeline with the launch of Redecan Amped Live Resin Liquid Diamond vapes, addressing consumers' demand for the full spectrum of cannabinoids strain-specific terpenes that deliver an authentic plant profile. This product combines 80% of live resin with 20% of liquid diamonds, maximizing potency while maintaining natural flavor integrity. In addition, we entered the Quebec market with vapes with a Good Supply brand, rapidly achieving that top 3 SKU positions in the province while underscoring effective execution and strong consumer update. Operationally, we hit our highest quarterly volume in 2 years with over 5.5 million units shipped in Canada in Q2. We also completed our first harvest from our restarted outdoor cannabis grow in Cayuga, Ontario, exceeding expectations on the THC content. With this extra biomass, our cannabis cultivation capacity rises to 200 metric tons annually but this boost not only allows us to provide high-quality products at reduced costs and improve our profit margin, but also helps us expand into fast-growing markets, supplying both Canadian and international customers, including those in Europe to meet increasing global demand. The positive momentum of the past two quarters reflect the trajectory of Canadian cannabis business With the right product mix, healthy margins, we're well positioned to elevate this business in the second half of 2026 and beyond. With the reschedule of cannabis in the U.S. now is the time for Canada to modernize its regulation and secure its position as a global cannabis leader, including excise tax reform, marketing flexibility, health care integration and on-premise consumption. Without modernization, Canada risks becoming an exporter of raw products while value creation, intellectual property and long-term economic growth moves elsewhere. As a global policy accelerates, the choice is clear, modernized Canada's cannabis regulation to support economic competitiveness, consumer education, sustainable growth or risk being left behind in an industry Canada helped to create. Prime Minister Carney, I hope you're listening to this call, the Canadian cannabis industry has generated a significant amount of jobs, contribute billions of dollars in tax revenues of both federal and provincial governments. However, the lack of regulatory reform is resulting in Canadian producers redirecting their investments and attention towards international markets where excise tax can be circumvented. Given the declining spirits industry in Canada, excise tax should be reduced, cannabis drinks should be permitted in liquor stores and on-premise location, medical cannabis sales in drug stores with lower excise tax burden while boosting overall tax revenues as the industry grows. Turning to our beverage business in Q2. Beverage revenue totaled $50 million. We continue to make progress executing our integration and optimization strategy. We delivered $27 million in annualized cost savings in the first half of the year and remain on track towards our $33 million target. We're making meaningful progress in improving performance. However, there is more to be done as we continue to integrate our brands, streamline operations and optimize processes. We acquired brands with the understanding that significant improvements and comprehensive turnaround would be necessary. A process that is currently underway through our integration plan, we recognize this transformation will take time. And while we have not achieved all our objectives. We are on track and encouraged by the positive momentum gained so far. We look forward to the up-and-coming spring product resets with our retail partners and the introduction of some of the new innovations in the market. These changes are anticipated to have a positive impact on revenue in the fourth quarter. Our outlook may seem bullish but conviction is essential for success, which remains our primary focus revitalizing the craft beer category, making beer fun again, bringing people together, fostering meaningful connections and generating long-term value for our shareholders. We've established brands, breweries, a major distribution system. Tilray is here to stay and not going anywhere. Tilray aims to expand its regional national and global presence through strategic partnerships with leading U.S. and international brands. We expect to share more about this in the future but we believe these partnerships validate the strength of our platform and our strategic vision. This approach also position us for future opportunities, should cannabis THC drinks become federally legal in the U.S. We're ready to produce and sell as we're currently operating a leading THC beverage operation across Canada with over 45% of the THC beverage market share. Regarding our U.S. hemp-derived THC business, we continue to offer Fizzy Jane's, Happy Flower hemp-derived THC beverages with 5-milligram and 10-milligram formats through nationwide retailer partnership. Distribution includes, nature wine liquor grocery outlets across the country. While regulatory changes may affect HDD9 products after 2026, we anticipate compliant participation under new federal laws, if it happens. We're also pursuing international growth by expanding our beverage business into new markets worldwide, we're expect to leverage our future strategic partnerships. Our strategy for beverage abroad is evolving with an emphasis on craft beer and nonalcoholic drinks, including energy beverages that meet the demands of consumers in this expanding sector where brands such as HiBall, our clean energy drink, Liquid Love, our sparkling water brand. HiBall is set to launch in the U.K. in Q4, with the expansion plans also underway for the Middle East and Africa. Beyond nonalcoholic beverages and the energy drinks, we continue to explore opportunities to build on our global craft beer segment. Tilray recently participated in the American Craft Beer Expo in Japan and gain valuable insight which the team will pursue in the future. Rounding out our beverage strategy, we're also focused on expanding our nonalcoholic beverages in the U.S. and across international markets. our recent innovations, including non-alc beers under Montauk, 10 Barrel and our non-alc ready-to-drink canned beverages and distilled spirits, including Mock One. Within the spirits category, despite market challenges in Q2, we focus on enhancing our commercial strategy, resulting in a 9.2% increase in depletions across vodka, bourbon and gin with vodka leading by double digit for the quarter. While the Broncos seasonal release sold out rapidly, our ongoing efforts to remain focused on expanding product distribution to additional states and beyond. With 5 years experience in the beverage alcohol industry, we remain confident in our future trajectory as we continue to enhance operational efficiency. Now turning to our wellness business. We generated revenue of $14.6 million, driven by a strategic focus on value-added innovation including high-protein, superseeds, better-for-you breakfast products, better-for-you snacking and the continued success of our HiBall clean energy drinks. Within our ingredient sales business, we've expanded our range of offerings in hemp protein, hemp oil, helping us further develop our business in North America and Asia. Our hemp food business remains fully insulated from proposed hemp THC regulation as these products contain zero THC and are broadly distributed across mainstream retail. In closing, we are confident in Tilray's trajectories for the second half of fiscal 2026 and beyond with a diversified, scalable platform, improving fundamentals strong liquidity, regulatory tailwinds developing globally, Tilray is well positioned to capitalize on the next phase of growth across cannabis, beverage and wellness products. Thank you to our shareholders for your continued support and confidence in Tilray's long-term strategy. I will now turn the call over to Carl to walk through our financial results in more detail. Carl, are you ready? Carl Merton: Thank you, Irwin. Before I begin, please note that we present our financials in accordance with U.S. GAAP and in U.S. dollars. Throughout our discussions, we will be referring to both GAAP and non-GAAP adjusted results and we encourage you to review the reconciliation contained within the press release of our reported results under GAAP with the corresponding non-GAAP measures. This quarter, we are reporting record second quarter net revenue and strong year-over-year improvements in profitability, and we are reaffirming our full year 2026 adjusted EBITDA guidance. Net revenue for the quarter was a record $217.5 million. Revenue growth was primarily driven by strong results in our international operations, both international cannabis and Tilray Pharma. Additionally, Canadian adult-use revenue grew year-over-year. Cannabis net revenue increased year-over-year to $67.5 million during the quarter driven by a strong 36% increase in revenue from international cannabis and a 6% increase in Canadian adult-use cannabis. The continued year-over-year growth in our international cannabis business reinforces our view that Q1 results were temporarily affected by the timing of import and export permits. As a result, Q4 2025 and Q2 of this year provide a more accurate reflection of our ongoing performance expectations for the duration of the fiscal year. With the continued growth of international cannabis, we deliberately chose to scale back supply into the Canadian wholesale market in the quarter and redeploy that supply, along with new growth into the higher-margin international cannabis markets over the remainder of the year. Beverage net revenue for the quarter was $50.1 million. Beverage revenue was impacted by category-wide headwinds in the craft beer segment and our own portfolio optimization efforts under Project 420 where SKU rationalization and margin-focused initiatives continue to impact revenue. However, we expect spring retailer product resets to help mitigate industry trends. These upcoming changes should improve brand visibility and align product mix with consumer preferences, which we expect to benefit better revenue and gross margins in the fourth fiscal quarter. Wellness net revenue was flat year-over-year at $14.6 million based on our strategic focus on value-added innovation and continued growth in HiBall and the ingredient channel. Results were offset by challenges in the club retail channel, which we are addressing through targeted initiatives. Distribution net revenue increased 26% year-over-year to $85.3 million based on our focus on competitive pricing, the prioritization of high-margin SKUs and favorable impacts from foreign exchange. We believe our distribution business will continue to complement and strengthen our international cannabis segment as we grow both in tandem. In terms of contribution, cannabis revenue accounted for 31% of revenue, beverage revenue was 23%, distribution was 39%, and wellness accounted for the final 7%. Gross profit during the quarter was $57.5 million, and gross margin for the quarter was 26%, while margins increased in cannabis, distribution and wellness. Margin construction in the beverage segment negatively impacted the gross margin for the quarter. By segment, beverage gross margin reached 31% this quarter. While this represents a temporary decrease from last year, we are confident that the ongoing implementation of Project 420 will deliver significant improvements while also actively working on additional cost savings to improve overhead utilization as well as SG&A. As these initiatives progress and sales volumes recover, we anticipate stronger overhead utilization and a return to higher margins. Importantly, we remain on track to achieve $33 million in annualized cost savings from Project 420 by the fourth quarter of 2026, positioning our beverage segment for long-term success. Cannabis gross margin increased to 39% compared to 35% last year. The increase was due to a greater proportion of sales being generated in the higher-margin international markets but was offset by increased sales in lower margin price competitive categories in the Canadian adult-use market like vapes and pre-rolls. Distribution gross margin increased to 13%, up from 12% last year, while continuing to grow top line revenue. In wellness, gross margin rose to 32% from 31% as we successfully managed input costs and enhanced operational efficiencies. Our adjusted cash operating income for the quarter was positive $6 million which excludes the noncash impacts of amortization and stock-based compensation. Net loss for the quarter was $43.5 million, a 49% improvement year-over-year compared to $85.3 million or $0.41 per share compared to $0.99 per share. It should be noted that EPS was impacted tenfold by the reverse stock split and has been reflected in both periods. Adjusted EBITDA for the quarter was $8.4 million compared to $9 million last year. Cash flow used in operations was down to $8.5 million compared to $40.7 million last year. The $32.2 million improvement in cash used in operations was almost entirely related to reductions in working capital. We ended the quarter with cash and cash equivalents and marketable securities of $291.6 million, $0.8 million in digital assets and improved from a net debt position of approximately $4 million in the prior quarter to a net cash position of almost $30 million at the end of the period. Additionally, during the quarter, we also completed our ATM program in the market. Our strong cash position provides us with the flexibility we need to execute on strategic opportunities and take advantage of the changing regulatory landscape and we intend to work to further strengthen our balance sheet throughout the remainder of the year. Finally, we remain confident in our business, our strategy, and our opportunity, and we are reaffirming our 2026 adjusted EBITDA guidance of $62 million to $72 million. We can now open the call for Q&A. Operator: [Operator Instructions] The first question comes from the line of Bill Kirk with ROTH Capital Partners. William Kirk: On the intoxicating hemp bans for November implementation, is there anything Irwin that the industry can do to try to help improve the regulatory outcome? Is there any way to kind of extend the grace period, reverse the ban, carve-out particular categories? Like what can you do or what can the industry do to get a better outcome there? Irwin Simon: Thank you, Bill. Great question. As you know, this, for us, was a growing business and there is a lot of demand for these products. And we are working with some congressmen, senators, lobbyists to either extend the deadline or to change some of the regulatory that would have a regulated amount of milligrams, whether it's 5 or 10 milligrams and to be sold on a national basis. And I'll tell you, so far, I have a really good feeling because we're talking to the different associations other than Senator McConnell and whoever backed him, there's no one out here against this and thinks this is something that should be banned. The other thing, Bill, just the other thing, I mean, there's a lot of jobs that will be lost if this happens which is something very important too. William Kirk: For sure. Carl, you had some comments about holding back supply and shifting it into international markets. Am I hearing that right that, that would mean sales that could have been in this quarter simply come later? And is there a way to quantify how much was held back? Carl Merton: So what I said was that we held back from the Canadian wholesale market at lower pricing than what we did in the prior year. And so last year, we did about $5 million. We obviously have the inventory levels that we have that are on the balance sheet that we could have -- that we can redeploy into European markets over the next 6 months of this year. Irwin Simon: So it's just redeploying better margin sales, Bill, where we can sell it into Europe and get much higher margin for it than selling it into the wholesale market where we don't get the margins and in some cases, we're even selling to a competitor. So that's what it is. Operator: Our next question comes from the line of Robert Moskow with TD Securities. Xin Ma: This is Victor Ma on for Rob Moskow. Two for me, please. First, I wanted to ask about Canadian adult-use cannabis. Growth in the quarter was about 6%. How much of that was volume growth versus price mix? Did you gain market share in the quarter? And then second, can you give a little more color on what drove the substantial increase in distribution sales? Was there any timing benefit that was realized in the quarter? Irwin Simon: So number one, absolutely, there was not price. Some of it came from new distribution, if anything. It was a strike in British Columbia that ultimately hurt us. And we did gain a little bit of share, not a lot in the quarter. So it's demand. I think there's a lot we did in different markets. A lot of our new products started to roll out. And -- so that was the big reason from our growth, having supply. And I think just the team has done a great job. This is the highest quarter in us, in selling the units 5.5 million units that we sold in the quarter. So again, if anything, throughout the rest of the prior years, we saw lots of price compression. I think the good news is we're not seeing that price compression right now. But we're seeing demand continuously growing and we're seeing all the Tilray different brands growing in the marketplace. And again, what I'm talking about is all our products, it's our flowers, our pre-rolls, our edibles, our vapes, our infused vapes and our drinks. Sorry, in regards to CC Pharma, listen, I think CC Pharma has been part of Tilray since 2019, and trying to figure out what is the right position is one of our largest business. And we have the European team and with the growth and the opportunities in Germany have realized a couple of things. Number one, they're selling into pharmacies today. We're using the CC Pharma team to sell cannabis also into the pharmacy and also to deliver. The other thing is here, we're able, from our buying power and get better margins and demand for regular medicines, and we're seeing some great growth. It's the biggest quarter we've ever had with CC Pharma and some of the most profitable quarters we've ever had. So we're looking at how we really take this business for online. We're looking at how we're going to expand this business and take this model into other countries. And again, it's how we utilize the sales organization of CC Pharma or now named Tilray Pharma and using that organization to sell more and more cannabis into the drugstores that it sells into. Operator: Our next question comes from the line of Aaron Grey with Alliance Global Partners. Aaron Grey: First one for me. You mentioned the expectation for Tilray Global Medical to approach $150 million, I believe. So just any color you could provide maybe on the timing of that expectation. And then you also mentioned some commentary briefly regarding potential regulatory changes in Germany as well as pricing pressure. So could you help to maybe quantify how big a risk you're seeing from each of those potentially for 2026? Irwin Simon: So in regards to -- listen, I think from an annualized basis, right now, we're on a run rate for that $150 million, and that is both Canada and international markets, okay? And the majority of that is coming from international markets. In regards to regulatory change, I'm not seeing and not concerned with regulatory changes in Europe and Germany. And I think if anything, we like what has ultimately come out of the German government. And in regards to demand, we see more and more demand. As far as price compression, and you heard what I said before. And this is where Canada better watch out. When you look at a lot of the Canadian LPs, there's a lot more the Canadian LPs, there's Israeli companies. There's a lot more companies selling product today into Germany. But Tilray has been in Germany since 2019, 2020 with Tilray Medical. We are the only one or one of the only ones with a grow facility there. And we work very, very closely with the doctors in Germany. You heard what I said before about having Tilray Pharma, where we are vertically integrated from our grow with our salespeople and have our own distribution piece there. So yes, a lot of product coming into Germany, which forces price compression. But what they're going to realize is the quality of product, you get what you pay for. And I think that's what important is they recognize that the Tilray Medical products stand for quality. Aaron Grey: I appreciate that. Second question for me, just turning back to the Canadian market, we had some commentary. More broadly, I just wanted -- to give some color in terms of what are your expectations for growth within the Canadian market? Looks like we finished about mid-single-digit growth for 2025. So what's your expectation now for 2026? You talked about some of the strong volumes there. But it does seem like volume growth has tempered a bit despite pricing pressure stabilizing for the Canadian market. So I wanted to hear more about your expectations for growth in the Canadian market and if a slowdown in growth also led to your decision to shift some of that product international? Irwin Simon: Well, first of all, this slowdown of growth. I had a 6% growth, and I had the highest quarter ever in selling units, okay? I think one of the things we're looking -- continuously looking at is how we grow this to more and more profitable business, and we can sell tons of wholesale product, that's considered growth, but we're not going to do that. But what we're looking continuously at is how we're coming out with added value products and premium products. And today, we have a 50% share on our drinks, which continuously is growing and the demand in that marketplace. We also have the highest share of flower in the marketplace. We sell over 80 million pre-rolls. We sort of backed away from the vape category because of the margins and we're not making money on it. So I see the categories from us, if I get mid- to high single-digit growth, I'll be very, very happy in the Canadian market. Now with that, I got to tell you, Blair is on the phone, and he can jump in here any time. I have seen some of the best lineup of new products coming out that this company has ever had. And I think that's going to help, new products are key. The other thing is, listen, the quarter and that -- British Colombia had a strike and I think if other Canadian LPs decide they want to sell product in Europe is just going to be supply. Tilray today has close to 7 million square feet of grow in Canada and has the ability to grow 270 metric tons. I think the number in the quarter as we grew close to 200 metric tons. So we have plenty of supply. And not only that is we have supply an ample product available to ship internationally which is -- we're not paying excise tax and much higher margins for us. So the opportunities are there for us. Canada is a small country, but it's a country where cannabis is legal from a recreational -- from a federal standpoint, is the only country in the world. And there's more and more users are seeing the benefit of buying cannabis by going into federally legal cannabis stores. Operator: Our next question comes from the line of Pablo Zuanic with Zuanic & Associates. Pablo Zuanic: Look, let me start with CC Pharma. Maybe you can give more color on that business. I think in the past, you said that you reached 13,000 pharmacies. Now you're talking about tripling your distribution reach. I'm trying to understand that better. And also, if the new regulations in Germany, top delivery your CC Pharma reach could be a big asset in terms of pharmacy reach? Would you be willing to also sell other people's products besides Tilray Brands through CC Pharma? Irwin Simon: So number one, as I said, we've owned CC Pharma for -- since 2019, Pablo, and it was finding the right way to operate this business. And originally, we acquired it as part of tenders for Germany. And we've been a part of the German drugstore business in Germany since then. We have now changed a lot within CC Pharma where we've ultimately modernized, we've put money into technology there. We've taken labor costs out of there. We've been able to buy medicines and -- regular medicines from some of the pharmaceutical companies at much better prices and made some big investments. And I'll tell you, that is a big -- is where they're buying medicines and making sure we're buying them at the right price and selling them at less higher margins. So we have focused on that business. But back to your point, is today, we have the ability to win to more and more pharmacies. The CC Pharma or Tilray Pharma has its own sales organization. And you don't see today cannabis -- medical cannabis sales go through CC Pharma, it goes through our medical cannabis business internationally. So there is a big focus to use that sales organization to sell more and more cannabis -- medical cannabis in Germany. And with that, with the regulations and everybody has to go direct to a pharmacy, it can't buy online, there's bigger opportunities for us because more patients have to visit the pharmacy. The second question is would I sell other company's product? Great question. We're in the business to sell and make profit. But again, why would we want to sell someone else's products that we can deliver what the needs are for patients. But again, some patients may want some other competitors' products, and it's something we should look at from a standpoint, does it make sense for us to carry some other products, I don't know. And that's not something we've looked at, but it's something we definitely should look at. Pablo Zuanic: Okay. And then just a follow-up in terms of beverages. Obviously, this quarter, you had very strong performance in cannabis but a steep decline in sales in beer and profit margins. Maybe just give more color in terms of what is it that has not worked there? You talked about positive momentum, but the numbers don't show that momentum and why put so much hope on just the spring resets? I mean is it just about that? I mean more color would help. And then just long term, a reminder about your confidence that the beer business really fits your cannabis strategy longer term or they just play together, and we should think of them as a diversified portfolio anyway. Irwin Simon: So number one, there's many, many companies out there that have diversified business portfolios. And if you look at most companies, some have food, some have personal care, some have beverages. You look at Pepsi, they have snacks, they have food, they have drinks. If you look at other companies, they have personal care, they have food. So I think it's important to be a diversified consumer packaged goods company, which we are, and we're Tilray Brands. I come back and look at -- we got in the beer business in late 2020, COVID came along where our first acquisition of SweetWater and then multiple acquisitions. It's taken us time to integrate these businesses. We went from only 1 plant to 10 plants now we're down to 8. We went from only 1 brand to 18 brands. We went from probably being the 10th or 11th largest craft brewer now down to the fourth largest craft brewer. So there's a lot that's happened over the last 4 to 5 years. And with that, there's been a lot of integrations. And these brands that we bought from ABI and from Molsons, they were not some of the best-performing brands at the time, and it took some time to turn them around. So yes, I have a lot of confidence. Listen, beer is not going away. Beverages is not going away. And just like CC Pharma, here we are from a vertically integrated business, we have manufacturing, we have brands, we have a distribution. We have an infrastructure, salespeople. And it is taking probably some more time. And the other thing is at the same time, the industry has had its decline. But I'll tell you what, as you come back and see a lot potentially will happen in regards to Delta-9 and hemp infused drinks, and who are they looking at to be the leader in that, is Tilray because of our beverage business and our cannabis business. I say this, and I'm not making projections, but if I could sell cannabis infused drinks, in the U.S. tomorrow. If I look what I have a 50% share in Canada, and I multiply that from a 10x what I would have here it's $0.5 billion business for us here. And someday, we're going to be able to sell drinks in the U.S. infused with something and whether it's CBD and cannabis, in regards to President Trump new rescheduling, in regards to drinks that will get approved by the FDA for -- whether it's for anxiety, for pain, for sleep et cetera. So the infrastructure is there for future opportunities, which is important. But to the point, we're in the beverage business today. We're in the beer business. We're in the energy drink business. We're in the water business, we're in vodka seltzers business. And I'll tell you what. The other thing is this here, there's a lot of companies talking to us involved -- to get us involved with different aspects of beverages because of what we have and how we're vertically integrated. So yes, am I totally doing the dance with our results today, coming out of there? No. But do I feel good about what we will do with this business? And what we'll do with these brands? Absolutely, and what our strategy is. Unfortunately, it just is taking a little more time. And if you go back and look at the big companies, Molsons, ABI, Constellation Brands. They weren't created within 5 years. And it's basically 5 years and we're #4 within the craft beer business. A lot of brands have gone away in the craft beer business which gives more and more opportunities. So I am really bullish on the beverage business. And if you look at the supermarkets today and you look elsewhere, Beverage is the biggest category out there. And I think, Pablo, the big thing, we are not just depending upon the resets that are happening in the next 2 months, gaining share in C-stores, gaining share on premise, gaining share in general. And that's what I'm excited about. Pablo Zuanic: That's great color. Look, if I may, I want to squeeze one more if you don't mind. In your -- and just a short answer. In your press release, you talk about U.S. federally rescheduling cannabis. But I think my understanding and most people's understanding would be that if they reschedule, it will still be a state-by-state program. It will not be federally rescheduled. But I guess your interpretation that it will be federally rescheduled. And I think that's a big distinction. Do you want to just share some color on that, but just briefly? Irwin Simon: Our plan is what I've said, if a reschedule -- what we're focused on, and I think a lot of other companies are focused on recreation, we are focused on medical cannabis. And our plan is to leverage the infrastructure and expertise and know-how that we've developed that we got a $150 million business in Tilray today. And with that, our $300 million distribution platform is something that we utilize in Europe and how do we ultimately do that here. And again, engage with the outreach of the government, with the FDA and with our -- working with hospitals, working with research, doing clinical studies. And that's what we're looking to do there in regards to our U.S. entry into Tilray U.S. not looking at it today of how we do state-by-state from a recreational standpoint. And ultimately, what are we going to do. And we have so much research in pain, anxiety, cancer-related drugs, cancer anti-vomiting drugs, PTSD and taking that science and taking those -- and taking our genetics and strains and working with hospitals and potentially strategically aligning with a pharma company to execute that within the U.S. is what we're looking to do. Operator: The last question comes from Frederico Gomes with ATB Capital Markets. Frederico Yokota Gomes: Just the first question, just going back to the rescheduling comment there with potential rescheduling in the U.S. I'm just curious, does that change the way you see potential investments in the state legal cannabis businesses like you've done in the past with MedMen. Irwin Simon: Yes. It doesn't anything with the state. But again, as I said, Tilray is committed to invest in research. Tilray is committed to invest in clinicals, Tilray is committed to working with the FDA, DEA, is coming up with approved cannabis drugs that can be used and sold for some of the conditions that I mentioned before. But it's not state-by-state where we're looking at recreational. We are totally looking at this from a total medical standpoint. Frederico Yokota Gomes: Got it. And then second question, international cannabis. Could you help us understand outside of Germany, what are the main international markets you have right now? And do you anticipate any other international markets where we could see some sort of regulatory change near term this year that could lead to growth like we saw in Germany since April 2024. Irwin Simon: So listen, whether it's Poland, there's today Italy markets. There's the U.K. markets. We're looking at oils for France and Spain. And I will tell you this here, without going into names, and countries, there's a lot of stuff happening in the Middle East in regards to working with CBD and THC from a Middle East standpoint, there are some stuff and testing going on in India in regards to hemp and hemp infused THC products. So again, and I will say this here, and that's why I thanked President Trump from a rescheduling standpoint. Rescheduling cannabis from the Schedule I to a Schedule III has opened up the eyes and the legality a lot of other countries here. And I think that's what was important, too. Once the U.S. did it, there's a lot of other companies now are saying this stuff is not taboo. It's something that's really benefit and this can be really helpful in a lot of different diseases, and it can be very helpful as a medicine. Operator: Thank you. I'd like to pass the call back over to management for any closing remarks. Irwin Simon: Thank you very much, operator, and thank you very much for everybody joining us today. As you can see, there is a lot happening at Tilray. And as a diversified consumer packaged goods company that today sells products into the recreational cannabis market in Canada, sells medical cannabis in Canada, sells drinks in Canada, sells beverages in the U.S. spirits and our hemp-infused -- our hemp foods, our wellness products and then our international products with -- our international medical products and our Tilray Pharma. So there's a lot within Tilray today, there's a lot of science, there's a lot of research, there's a lot of genetics that we're doing. And as a 5-, 6-year-old company today that's really pulling this all together, and there's no one out there today that is diversified like us. One of our strengths is our balance sheet. It's -- we're in a net cash position. So we're able to invest in research. We're able to invest in trial. We're able to invest in clinicals today. So you can't look at us today as a recreational cannabis company. You can't look at us as just a beer company. And you've got to look at us today as a consumer company that looks at products and looks at different ways to help bring consumers together, help bring people together. And that is some of the stuff we're doing. At the end of the day, as you can see what we've done this quarter in regards to our profitability for our shareholders. And again, it's been 5 years and putting this together piece by piece, and there's a lot to do. The question asked by Pablo in regards to our beverage business. Yes, there's a lot to do in the acquisitions that we've done. And one of the proofs is here, look at the acquisitions we've done on cannabis as we put these cannabis facilities and brands together took out costs, integrated the businesses, and we're seeing the performance of that today. It's no different. We've really only got into the international cannabis business over the last year or so, and that's on the run rate to be a $100 million business. So there's a lot to do within Tilray. There's a lot of great assets within Tilray, whether it's facilities, whether it's brands, whether it's distribution, whether it's know-how. And there's a lot of AI coming into Tilray today to help us implement a lot of what's happening. I appreciate those that have stayed with us as shareholders, I know there's times you're frustrated and there's times probably I'm frustrated more than you are. But I do see a good path with a lot that's happening coming together. I got to tell you, we deal with a tough regulatory environment out there. We pay some of the highest excise tax in Canada and I hope Prime Minister Carney heard me how important this industry is for the Canadian market, the jobs that created the tax dollars, and we don't want to see this run away from Canada. I commend President Trump for rescheduling. He was the first President that really took this on. Everybody else sort of ran away from it. And it's up to us now to show what this really can do. So thank you very much for getting on our call today, and happy New Year to everybody. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics Earnings Call for the Second Quarter Fiscal Year 2026. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to your speaker, Ed Richardson, CEO. Please go ahead. Edward Richardson: Good morning, and thank you all for joining Richardson Electronics conference call for the second quarter of fiscal year 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Bob Ben, Chief Financial Officer; Wendy Diddell, Chief Operating Officer; Greg Peloquin, General Manager of our Power & Microwave Technologies and Green Energy Solutions Group and Jens Ruppert, General Manager of Canvys. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we're making forward-looking statements that are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. I'm pleased to report that Richardson Electronics has achieved 6 consecutive quarters of year-over-year growth. underscoring the progress we're making in executing our multiyear strategy. This growth reflects our continued repositioning toward higher growth end markets, and the expanding contribution from our engineered solutions. Equally important, these results are driven by the strength of our people. While investors are familiar with our senior leadership team, we've been intentionally investing across the organization to build depth, diversity and technical expertise throughout our ranks. I believe we have assembled one of the strongest and most motivated teams in the company's history, positioning Richardson Electronics for long-term sustainable value creation. Looking at our Q2 FY '26 results. Total sales were $52.3 million, up from $49.5 million in Q2 of last year driven by sales growth in our Green Energy and Canvys businesses. Operating income improved to $132,000 versus a loss of $667,000 last year. Within our GES business unit, we're very pleased with the year-over-year growth as well as sequential quarter-over-quarter growth. Both onshore wind and EV sales were up over the prior year in Green Energy segment, reflecting higher sales from existing customers as well as sales from new products and expanded customer base. Canvys revenue exceeded the prior year by 28% on improved demand from our medical OEMs. It's important to note that the sales growth was partially offset by the inclusion of our health care business in both the current year and the prior quarters. As a reminder, we sold the majority of our health care business in Q3 of FY '25. So this will impact our year-over-year comparisons through the end of Q3 this year. We also remain focused on managing expenses and improving inventory turns. Our cash position remains strong at $33.1 million providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Bob Ben, our Chief Financial Officer; who will provide a detailed review of our second quarter results and capital positions. Following Bob's remarks, Greg and Jens will provide updates on our business units and then Wendy will follow up with the progress we are making executing again on our multiyear growth strategies. Robert Ben: Thank you, Ed, and good morning. I will review our financial results for our second quarter and first 6 months of fiscal year 2026 followed by a review of our cash position. Consolidated net sales increased 5.7% to $52.3 million compared to net sales of $49.5 million in the prior year second quarter. When excluding health care, for which the majority of assets were sold in January 2025, net sales increased by 9.0%. Please note that health care results, including prior periods are consolidated into the PMT segment beginning in fiscal 2026. This was our sixth consecutive quarterly year-over-year increase in sales. Second quarter net sales growth was led by a 39.0% increase in GES sales, driven by an increase in power management products. Canvys sales increased 28.1% and which primarily reflected higher sales in North America. Sales for PMT were 4.0% below the second quarter of fiscal 2025. Excluding health care, PMT sales were approximately flat. Consolidated gross margin for the second quarter was 30.8% of net sales compared to 31.0% during the second quarter of fiscal 2025. The slight decrease in consolidated gross margin was primarily due to lower margin in PMT and GES, partially offset by higher margin in Canvys. Operating expenses as a percentage of net sales improved to 30.5% for the second quarter of fiscal 2026 compared to 32.3% in the second quarter of fiscal 2025. Operating income improved to $0.1 million for the second quarter of fiscal 2026 from an operating loss of $0.7 million in the prior year second quarter. Net loss was $0.1 million for the second quarter of fiscal 2026 compared to $0.8 million in the second quarter of fiscal 2025. Net loss per common share diluted was $0.01 in the second quarter of fiscal 2026 compared to $0.05 in the second quarter of fiscal 2025. EBITDA for the second quarter of fiscal 2026 improved to $0.7 million versus breakeven in the prior year second quarter. Please note that EBITDA is a non-GAAP financial measure and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our second quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of the results for the first 6 months of fiscal year 2026. Net sales were $106.9 million, an increase of $3.6 million from $103.2 million in the first 6 months of fiscal year 2025, which reflected higher sales across our business segments, except for PMT. When excluding health care, consolidated net sales increased by 7.8% and PMT net sales increased by 5.2%. Gross margin was 30.9% of net sales which was a slight increase from the first 6 months of fiscal 2025. As a percentage of net sales, operating expenses for the first 6 months of the fiscal year improved to 29.8% from 31.1% for the first 6 months of the prior fiscal year. Operating income for the first 6 months of fiscal year 2026 was $1.1 million as compared to an operating loss of $0.4 million for the first 6 months of fiscal year 2025. The company reported net income of $1.8 million or $0.12 per diluted common share for the first 6 months of fiscal year 2026 versus a net loss of $0.2 million or $0.01 per diluted common share for the first 6 months of fiscal year 2025. EBITDA for the first 6 months of fiscal 2026 was $4.0 million versus $1.7 million in the prior year's first 6 months. Turning to a review of our cash position. Cash and cash equivalents at the end of the second quarter of fiscal 2026 were $33.1 million compared to $35.7 million at the end of the first quarter of fiscal 2026. Capital expenditures of $1.6 million in the second quarter of fiscal 2026 were primarily related to our manufacturing business, facilities improvements and IT systems versus $0.5 million in the second quarter of fiscal year 2025. We paid $0.9 million in the second quarter for cash dividends. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the third quarter of fiscal 2026. As of the end of the second quarter of fiscal 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. Now I will turn the call over to Greg, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Bob, and good morning, everyone. GES and PMT are key components of our multiyear growth plan. Coming out of FY '25, we had strong backlog. We launched several new products, expanded our customer base and advanced multiple development programs from beta testing to preproduction. This momentum continued into Q1 and into Q2. Building on this progress in Q2 of fiscal year 2026, GES grew to $8.3 million, a 39% increase over prior year and 14% increase over this year's first quarter. As we continue to see the amazing adoption of our Pitch Energy Modules for various wind turbine platforms with owner operators and other related power management products throughout the world. PMT sales were $35.2 million in the quarter a 4% decrease over prior year. This reflects a slight slowdown in the electronic device MRO business, offset by growth in the RF and Wireless Components business unit. Our GES strategy centered on power management applications. We've rapidly designed multiple products, secured patents and built a strong base of customers and partners. Our success is evident in our growing sales pipeline as we capitalize on numerous growth opportunities to support new power management requirements and significant energy transformation opportunities. Our Pitch Energy Modules and related wind energy products led GES quarter-over-quarter growth. We continue to gain market share by developing new products and solutions that are accepted by our customers, and the team is doing a great job expanding this program globally. We serve dozens of wind turbine owners operators including exclusive partnerships with the top 4 owner operators of GE wind turbines such as RWE, Invenergy, Enel and NextEra. We also saw growth from our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding into Europe and Asia with new products for other turbine platforms such as Suzlon, Senvion, Nordex and SSB. We have now received orders from customers in Brazil, Australia, India, France and Italy in addition to our strong rollout in North America. We are entering the back half of FY '26 with solid momentum. We recently added key technology partners such as KEBA, Goshen and Wulong, who play critical roles in both wind power management and energy storage systems. Key initiatives include faster design to production cycles supported by a new design center in Sweetwater, Texas. Sweetwater has one of the largest concentrations of wind turbine and power management engineers in North America. Expanding our design team to accelerate and enhance design cycles prior to transitioning work to our world-class manufacturing and test group in LaFox, Illinois. This is one of our most critical strategic priorities underway. We expect to have the Sweetwater design center fully operational in Q3 of FY '26. We are also adding key people from the industry to help expedite growth. We are on schedule to complete our Illinois-based demo center in Q4 FY '26. This demo site will allow us to showcase our active BES solutions to potential customers. We are currently collaborating with numerous customers on BES systems that we can support with our current technology partners. In fact, we booked our first system at the end of December. Our GES products and technology partners support our niche product strategies as it appears federal subsidies will be harder to get under the current administration. Looking at our new ESS project and strategies, we are focused on sales in key states, and we'll continue to offer large subsidies such as Illinois, Massachusetts and California. We are also expediting our efforts to expand global market penetration of our power management products for Green Energy applications focusing on Europe and Asia. Currently, about 70% of our GES sales are in North America. Turning to Power & Microwave Technologies Group or PMT, which includes our Electron Device Group, EDG, and our legacy tube semiconductor wafer fab equipment business and the RF and Microwave Components Group, or PMG. In the quarter, we did see some sales growth, led by increased demand in our RF and Microwave Components business as we see growth in RF and wireless applications such as SATCOM and military applications, including radar and drone technology. While semi fab sales were flat in the quarter, we are encouraged by our customers' forecast indicating growth for the rest of the fiscal year. Looking ahead, we are excited about the strategic initiatives across PMT and GES, including our ESS program, global expansion of our key products and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impact of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. We are investing in infrastructure, expanding our design and field engineering teams and enhancing our in-house design and manufacturing capabilities. To support growing demand and innovation, our engineering teams continue to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in power management, RF and microwave and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions allowing our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. We are working on these initiatives alongside marketing, our manufacturing design services to companies who need partners in the U.S. to manufacture, test and support products currently made in other countries. We acknowledge there are a lot of moving parts but we have successfully used our global resources, infrastructure and capabilities to mitigate the effect of these situations like this in the past. So in summary, we remain optimistic about our growing project-based business, even though it remains hard to forecast. We continue to increase our technology partners, design opportunities and engineering staff. We have a new technology partnerships that fill technology gaps. We have proven strategy of identifying opportunities in the multibillion-dollar markets we serve. As a result, we continue to feel FY '26 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens to discuss Canvys. Jens Ruppert: Thanks, Greg, and good morning, everyone. Canvys engineers, manufacturers and sells custom displays to original equipment manufacturers across global industrial and medical markets. It is our mission to deliver high-quality display solutions tailored to our customers' needs. Canvys reported revenues of $8.8 million in the second quarter of fiscal year 2026 an increase of 28.1% from $6.8 million in the same quarter of the previous year. Our gross margin as a percentage of net sales increased to 32.6% from 31.7% in the second quarter of fiscal '25, primarily due to product mix. The backlog at the end of the second quarter of fiscal 2026 remained strong at $38.0 million, providing a robust foundation for future business. During this most recent quarter, Canvys secured orders from both repeat and new medical OEM customers for a range of applications. Our primary focus remains on robotic-assisted surgery, navigation endoscopy and human machine interface HMI solutions for the control of medical devices. Furthermore, our solutions are widely utilized in various commercial and industrial applications. For instance, our products enhance passenger information systems in trains and buses and improve HMI technologies used in printing, vending, billing and packaging equipment. Our initiatives focus on increasing Canvys' visibility and market leadership by seeking new opportunities, building customer relationships and collaborating within the industry to drive growth. Looking ahead, while the business is still project focused and can therefore vary quarter by quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing request for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while are focused on implementing strategic plans to ensure sustainable growth and deliver long-term value for our shareholders. I will now turn the call over to Wendy. Wendy Diddell: Thank you, Jens, and good morning, everyone. While the remainder of our health care business, including the manufacturer and repair of certain CT tubes is included in PMT, I want to continue providing key highlights as we go through this transition period over the remaining quarters of FY '26. As a reminder, we sell CT tubes exclusively to DirectMed as part of the January 2025 sale and distribution agreements. Over the last quarter, we continued to make excellent progress finishing production of our ALTA tubes. We should wrap this up by the end of third quarter of this fiscal year. We've also made good strides during the recent quarter repairing Siemens Straton Z tubes. We are preparing to launch the repaired Siemens MX series as early as the fourth quarter of this fiscal year. Given the health care transaction occurred in Q3 FY '25, Q2 and Q3 of FY '26 will continue to show unfavorable comparisons. However, the combination of completing the production of the ALTA tubes and expanding our Siemens program for DirectMed will result in an improvement to our bottom line beginning in FY '27. Switching to an overview of our multiyear strategy. We continue to focus on accelerating growth and improving efficiency. In the second quarter, we had significant growth in our Green Energy business unit, reflecting our ongoing investment in this sector and the benefit of new products generating revenue. Today, we are shipping our Pitch Energy Modules for nearly all GE manufactured turbines to an expanded customer and geographic mix. There are several additional products in development and test that should start contributing to revenue growth in calendar year 2027. We also continue to make progress developing a world-class battery energy storage design center at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate and our turnkey solutions and technology partners position us to capitalize on that growth. In the quarter, we added several projects to our pipeline, including one that closed end of December. Our made in America activities are also generating interest. We are utilizing existing customer and supplier relationships to promote our engineering and manufacturing capabilities here in the U.S. We've reached the quoting and prototype stage on several programs, primarily taking advantage of our PCB facility as well as our battery knowledge. This isn't a fast process but the upside of new programs will play a key role in fully utilizing our factory and resources. Finally, we are expecting stronger demand for our engineered solutions within the semiconductor wafer fab equipment market, well into calendar year 2026 and beyond. This growth is tied to the ongoing benefit of AI on equipment demand throughout the world. We are well positioned to benefit from growth in memory-related applications. This growth takes advantage of our existing resources and manufacturing facilities as well. We remain focused on efficiency and cash generation. The period of elevated inventory investment relating to a single critical supplier is nearing completion as that supplier prepares to exit production of powergrid tubes. We expect final inventory receipts of approximately EUR 1.5 million in the first quarter of calendar year 2026, after which inventory levels should normalize and cash conversion improve. This inventory provides product coverage through 2030. We have identified alternative supply sources with sufficient time to ensure continuity, quality and fulfillment of customer demand. Outside this area of growth, we continue to focus on controlling inventory and improving turns. We have also initiated a disciplined cost-controlled effort to explore the benefits of AI by creating an enterprise-wide AI steering committee. This effort is expected to create a road map focused on practical high ROI applications across our global operations. The goal is to drive efficiencies, improve decision-making and reduce manual workload while maintaining strong governance around security, data privacy and responsible AI use. Importantly, this initiative is designed to leverage our internal teams with clear milestones and tight scope controls, ensuring we capture meaningful benefits without significant incremental cost. Longer term, we remain focused on driving growth through a combination of organic initiatives and a disciplined approach to acquisitions. We continue to evaluate opportunities thoughtfully with an emphasis on leveraging our existing capabilities and global infrastructure to support sustainable growth. We believe our current strategic initiatives position us well to drive revenue and profitability over time while we remain patient and selective as we consider potential longer-term acquisition opportunities. I'll now turn the call back over to Ed. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. It also reflects the talent of this management team to adjust to constantly changing market conditions. By sharpening our focus on repeatable sales, driving strong cash flow and building on our scale across power management and alternative energy solutions, we're positioning the company for long-term success. At the same time, we remain disciplined in our commitment to improving profitability. These priorities give us the confidence in our ability to deliver sustainable value for our shareholders, customers and employees as we move forward. We'll now open the call for questions. Operator: [Operator Instructions] Our first question will come from the line of Bobby Brooks from Northland. Robert Brooks: You mentioned how overall GES backlog declined, but that core backlog grew. Could you just discuss what would be considered core backlog versus noncore? Gregory Peloquin: Sure, Bobby. This is Greg. So the backlog -- so sales were up 39% and backlog was down $57,000. That's not too bad. You grow 39% your backlog only decreases $57,000. So when I talk about core backlog, we have the products that you and I have talked about, the Pitch Energy Modules and everything else. We also have a group of customers that are -- we're selling components into that are building Green Energy products. It's a much smaller portion of GES, but that's what we call the noncore and that book-to-bill was down. But if you look at the core business, which is 95% of it, the book-to-bill was 1.10 on 39% growth and of course, 15% above that. So we're very excited about the business -- core business that we talked to you about that you know about. Those are the products that are growing. Robert Brooks: Got it. That's helpful and really good to hear. And then maybe what's -- what's the right way to think about cadence of orders turning to backlog and then revenues within GES? Like are there certain product lines that can be booked and shipped inter-quarter? And that maybe was a dynamic that spurred the strong GES sales in the quarter? Gregory Peloquin: Exactly, Bobby. So as these products come out, they go from alpha beta to production, and then once that happens, you see we have new customers every quarter, new sales. And so that business is what led to the growth. And as you know, we're expanding that model, which is about 85% North America, expanding it into Europe. So we had wins in Europe that we booked and then wins in Asia that we booked. So that core business that we talk about that's growing quite heavily, and we continue to get new customers and backlog. So we're starting to understand what the annual usage is. And so we're trying to get ahead of the game and build products for stock. It's a guessing game. They do give us a forecast, but they're terrible forecast. So in Q2, we did ship a lot of product from stock. So that's a book-to-bill of 1. That's flat bookings or backlog, and that's where you saw it. So the team has done a great job working with these key customers, trying to develop their annual needs. And then when they come in for 1,000 units, just kind of out of the blue Bobby, I know a couple of those were able to ship from stock. So that's how it's working. And we're continuing to try to make sure we have inventories so we can ship from stock. But in a very positive way, we're seeing higher demand than what we're building. Operator: Our next question will come from the line of Anja Soderstrom from Sidoti. Anja Soderstrom: So I'm just curious with the GE approval list for the [ ULTRA1000 ], where do you -- and what kind of opportunity could that present? Gregory Peloquin: Say it again, Anja. For the what product? Anja Soderstrom: The [ ULTRA1000 ] for the GE approval list. Wendy Diddell: I think Anja is asking about the GE, where do we stand with GE getting approval for the -- for your ULTRA3000. Gregory Peloquin: Okay, yes. So... Anja Soderstrom: Okay. I am sorry, just mixed up. Gregory Peloquin: So Anja, we have GE approval. We're the featured product on their Internet site or their marketplace product. What -- we're not driving this. This is being driven by their customers. So NextEra and Invenergy has been pushing GE because they have a handful of sites where they're using GE services to do maintenance and service. And so all we need to do is have GE. We're going to send them some product, and they're going to try to literally blow it up. I mean it's all about what this product will do so they can improve it from a safety point of view. From a performance point of view and working in their turbines, that's already been approved, that's already done. So we've been going back and forth with an NDA. I've worked for a $30 billion big company -- for the $30 billion company before, and it just -- it takes time. So we have an agreed NDA. We signed it. We sent it back to them. We're expecting it back. But I will tell you, Anja, these people aren't waiting. In fact, we booked a large number of business that they said, you know what, will outsource this ourselves. We won't use GE services to install these Ultra3000s, which we've been buying for other sites for 3 or 4 years. So it really right now, I don't see it being a slowdown of any sort. We have more than enough business right now. It will be an upside. But I wouldn't doubt if they just say, you know what, we're not going to use your services to do our Pitch Energy Modules because these things are such a cost savings to these owner operators and they eliminate a huge problem that they have, I don't think they're going to wait for this. So this is being driven by GE's customers. We're just supporting it. But again, we finally have an agreed NDA because I'm not sending them any product without an NDA. We're going to send them products here this quarter, they'll test them, and then they'll say, okay, their service group can install these into the turbines. But it's interesting, some of these owner operators aren't waiting for them. They're just doing it themselves and installing it themselves or outsourcing it. Anja Soderstrom: Okay. That was helpful. And then what's kind of margin impact does the medical have. What kind of opportunity do you see there as you conclude that supply agreement? Wendy Diddell: Okay. So this is Wendy. Year-to-date, the overall hit to the gross margin in PMT has been almost negligible. It's about a 0% gross margin, so we're not experiencing a huge hit there. It's the addition of the SG&A. And on a year-to-date basis, while we're doing better than we anticipated with that, we still are losing money. As we mentioned in the call, we anticipate finishing up the ALTA tube production in the third quarter. And when we conclude that, and we're focusing then strictly on the repair of the Siemens tubes. We expect that to turn to a profitable bottom line contribution. So I'm estimating, we're estimating at this point that, that will begin in Q1 of FY '27, but we're going to do everything we can to pull that into Q4. Anja Soderstrom: And then you're sitting on some cash, and we expect cash flow to improve as you are finishing building up the inventory for the powergrid tubes. What do you plan to do with all the cash? Wendy Diddell: Well, I'll jump in first and then Ed and Bob can also contribute. The first thing we always remind everybody, Anja, the cash is spread out throughout the world. And I believe today, about 70% of it sits outside the United States in various legal entities. And that cash has to stay there. So while it looks like -- I mean, $33 million is a great number, and we're going to continue to focus on growing that. Please do remember that some of that is not in the United States. So we're going to continue investing in the growth initiatives primarily in the alternative or green energy solutions part of the business. We -- Greg mentioned the Sweetwater, Texas facility and improving our new product development cycle. We're looking at some additional both sales and engineering resources that support that business. So we really want to hold that money that we have in the United States for those type of investments. We are continuing to be very opportunistic and open-minded about small acquisitions. Those would be ones that would be easily bolted on. Again, focused primarily in alternative or power management and focused in areas where they bring in engineering or some type of product that is unique or exclusive to the market. So those are the areas where we're really holding our cash. Ed and Bob may want to add to that. Robert Ben: I can add to that. Anja, it's Bob Ben. Just to let you know, we do -- the cash that we have on hand that we're not necessarily using on a daily basis. We have invested in various money markets, and we're getting an average yield of about 4% right now, just under $10 million of our total cash is invested in that. And so we are doing that and that's what you see on the income statement as investment income, which is located in the other income section of our income statement. Anja Soderstrom: And then a last question in terms of the semiconductor. What do you see there? And do you still expect that to pick up in the second half of '26? Wendy Diddell: In the semi fab equipment market. Is that your question Anja? Anja Soderstrom: Yes. Wendy Diddell: Yes, absolutely. From all of our customers in that market segment, they are anticipating solid growth through the rest of calendar year 2026 and beyond. And we're starting to see some of that in our more near-term forecast. Operator: Our next question will come from the line of [ Chip Rui from Rui Asset Management ]. Unknown Analyst: I want to follow up on the semi question that was just asked. I mean it seems memory has gone from dead on arrival to the hottest thing out there. I know you've not exclusively memory on your both sides. But has there been a cadence shift with what your customers have talked about. I know last quarter, Ed said you would finally kind of work through kind of end customer inventory. Can you just give us a little bit more visibility on perhaps a cyclical recovery there? It seems you're still a little low from a revenue and earnings point of view, but historically a large contributor for the company. So kind of when you say there's a better outlook, is it inflected positively? Or are you still hoping it will inflect positively? A little more color on that would be great. Wendy Diddell: So I'll start on that, [ Chip ]. So as I mentioned, we're starting to see stronger forecast for our Q3 and Q4. Bear in mind that the forecasting is not always the best and it tends to bounce around a lot as we've been discussing really for the last couple of years. But we do see, again, across multiple customers within that channel their input to us is get ready. We are ready. We have the resources. We have the space. It's not going to cost us a lot of money in terms of realizing upside. I also want to point out that on a year-to-date basis, Q1, Q2, we're still up considerably over prior year's first 2 quarters. So we are cautiously to more than cautiously optimistic about Q3 and Q4, and we're ready. So I don't know if that answers your question, maybe you could follow up if you have anything more you want to know. Unknown Analyst: No, that's helpful. It's just -- I know it's up a little bit, but we're still -- it seems like the industry is gearing for a pretty big upcycle. And even though you're up, you're still nowhere near where you were a couple of years ago. So hopefully, it's some upside. And then I'll just make a comment on the buyback. I've never pushed you guys your buyback. I understand where your cash is globally. But everybody on the call was bullish across the board this morning from pitch energy, not only with GE to global, it seems semi is getting better. You've got new product development. It seems to me the enterprise is inflecting positively on multiple levels, yet your stock is once again down and the analysts are focused on backlog and sequential margin. I know you don't have a lot of cash, but $3 million or $4 million of that cash could be a couple of percent of your market cap. You also have an undrawn revolver, which would be in the U.S. My recommendation is carpe diem. I mean if there's a time to buy stock, it's when it's down and when people don't see the vision that you guys see. It seems to me if what you're saying comes to fruition, this is just an incredible opportunity. So I'll leave that as a comment. Wendy Diddell: Thanks, [ Chip ]. We appreciate the input. Operator: [Operator Instructions] Our next question will come as a follow-up from Bobby Brooks from Northland Capital. Robert Brooks: Could we maybe just discuss the growth initiatives that you guys launched a couple of quarters ago and kind of how those are progressing in a little bit more detail? Just curious to hear more on that. Wendy Diddell: Are you referring specifically to the made in America program or specific products under Green Energy? Robert Brooks: Just kind of broadly any growth initiatives that came -- that kind of step from the cash that you got from some of the health care business. Gregory Peloquin: I can talk a little bit about the PMG and the PMT and GES business. So as you know, Bobby, the growth initiatives were: one, to expand internationally, the product; two, implement our energy storage system program and continue to add new products. And all of those were successful in the past 2 quarters. So on the global expansion, as I think we've talked about, we now have orders and have shipped orders into Asia and Europe. We are coming out 3 new product -- I'm sorry, 2 new products in Q2 from our new Sweetwater design center that are already in beta testing with a couple of very large owner operators. So we'll introduce those and we fully expect to start receiving bookings for that. And on the ESS side, we rolled it out. We have technology partners. And in December, we booked our first order for energy storage system with the town or the city or city of Goleta, California for their water waste treatment facility. We will also be supplying the solar panels for that and the energy storage system. Through that process, it kind of confirmed that our niche approach going after utility and small -- comparatively small, very large to us, 2-megawatt type systems. That was booked in December. And we have a list of other ones that we're pursuing in quoting. These quotes are 10 to 15 pages a piece. But we're still very excited about our strategy in terms of technology partners that component business grew. Our Engineered Solutions business grew. We've added new products. And then the BES thing as we grow it, we really feel strongly, especially for the State of Illinois, once that demo center is in place and people can see it. See how it works and see we would train them and educate them on how to get all these rebates that the State of Illinois gives the best in the nation, even better than California. So those are our main initiatives, and we have traction. I'm not a patient person. It's never been one of my attributes of the few I have. But we continue to push, and we continue to every month, get some sort of success and a handful of indications that we have the right strategy, the right technology partners and a real niche that we found in these multibillion-dollar markets. Wendy Diddell: And Bobby, I would just add to that -- okay, go ahead. Robert Brooks: No, you go. You go. Wendy Diddell: I was just going to add in terms of other investment areas. When you look at our SG&A, you're going to see that's relatively flat. Our headcount is flat. What we're doing there is as we have normal turnover, we are reallocating those resources to the high-growth areas that Greg just went through. So you're not -- no one should expect a huge pop in the SG&A as a result of these investments. We've talked about the spend on the Thales inventory, and that should be ramping up. So that's one area where we've continued to spend some money. On CapEx, Bob mentioned in his script that we've made some necessary facility and IT improvements. We also added a second PC board layout facility here, which is playing in nicely with the made in America initiative that we launched a couple of quarters ago. So in general, I think what you're going to see is us moving some things around, again, rationalizing and gaining efficiency from a lot of the people and the resources that we already have. Robert Brooks: That's great to hear. And then just one clarification, Greg, in your opening remarks, you kind of mentioned some tailwinds in the PMT business and some -- and what seemed to be some headwinds in the business as well, like that occurred intra-quarter. Could you just expand or talk about that again and maybe expand on it a little bit more? Or -- and maybe I was missing the ball, too. Gregory Peloquin: Yes. I mean I don't know of any substantial tailwinds in PMT. We obviously have a good grasp on the semiconductor market. We have seen some strong revenue and bookings on the RF and wireless side. We're seeing -- and just a reminder, Bobby, at one time before we sold it, that group was up to $0.5 billion. So we know that market very well, and we have a lot of relationships, and we have probably some of the best RF and wireless suppliers in the world. And we're really seeing some traction again in the quarter from a tailwind point of view in the SATCOM and actually drone markets. And so that was a nice pickup for PMT anyway in terms of sales. It's lower-margin business. It's demand creation, but it's components are made by our technology partners. So that maybe is somewhat of a tailwind in terms of where we saw some upside in PMT and where we will see some upside going forward. Wendy, I'm at Mayo Clinic, everybody. I got -- I have to go a -- meet with my surgeon. However, the last time I was here it was 3.5 years ago with a hip replacement and a half hour after that surgery, I got a call from NextEra with a $10 million order. So I might stay here the weekend and see if I can pick something else up. All right, Wendy. Wendy Diddell: Thanks, Greg. Operator: Our next question will come from the line of Ross Taylor from ARS Investment Partners. Porter Taylor: A couple of quick questions. One, with regard to the semi-cap equipment space, have you guys built prebuilt product for that, it's something on your work in progress or your finished goods inventory line there that you've been -- because you've been preparing for this for some time. It seems that they have been a little slow getting the pull-through. Wendy Diddell: Ross, yes, we do that where we can. I think we've described the business before as being very high mix, low volume. So it's not the type -- it's not like the ULTRA PEMs or the ULTRA3000s where we can build them. It's all the same products. So we don't have the kind of inventory that maybe you envision of having thousands on the shelf ready to go. But we have good exposure and good track record in terms of what the demand is. And we are certainly doing everything we can to make sure that when those orders come in, they go out almost instantaneously. So little bit of a mixed answer there for you. Porter Taylor: Okay. And that's still should be -- historically, it's been -- think about your highest margin business. And I would assume that should you get back to more aggressive run rates, that would return. Wendy Diddell: It's a good business for us. Porter Taylor: Okay. Another quick question. Can you talk about -- give more color on the battery storage opportunities? And what kind of magnitude, what kind of time line are we looking at in that space because it's a fairly -- I mean, it seems to be a very important area we're seeing, whether it's AI data centers or quite honestly, just even factors or others given the nature of the grid. Wendy Diddell: So Greg, just dropped off, Ross, that would be an area for him to address. But what we can tell you is that his list of opportunities continues to grow. They range right now in size, magnitude anywhere between maybe $0.5 million on the small end to a couple of million or more on the large end. He is focused and the team is focused heavily in the industrial and commercial market, more of the let's look at it as kind of Tier 2, not the data AI centers per se. Those might be a little bit bigger than what we're planning to build. But it's an area where we've seen a lot of strong interest particularly in the states that Greg mentioned where the states are still providing a lot of incentives. But I don't think anybody can pick up anything and read anything without seeing the growth in energy storage requirements. So we fully plan to take advantage of that. And we'll try to bring some more color to that in the next call. Porter Taylor: Okay. And do you think -- one like philosophical, you and I've had this question, one of the things that this company has struggled with is it's historically been more of a project-based business. Do you see some of these things we're talking about here, becoming basically run rate businesses where we can kind of see a more steady annual flow through in top and bottom line? Wendy Diddell: I think you see that already. Certainly, you see that in EDG. We've talked about that. I think you're seeing it in the green energy piece with the wind. And I would expect that not only to continue to grow as we expand both the customer base and the geographic area that we cover. I think those -- I call those bread-and-butter items. I love them because to your point, they're going out on a regular cadence. Some of the train, the EV rail, the -- for example, the starter modules those will be more steady run rate. But we always are focusing on and trying to focus on products that will apply to a much broader market, not simply one customer or one program. Porter Taylor: And obviously, success there would be, I think, important. It would take away a lot of the volatility in earnings. And I will offer my comment on buyback. I think my position on it is well known. It's been voiced many times on these calls in the past. What I would say is, I can't believe that your Board doesn't think this company is worth substantially more than book value and you're currently trading at or under book with a substantial 20% of that being cash here or overseas? And so I know what I'd be saying if I sat on your Board, I'd be arguing that this company is worth a lot more than book, and you should be quite comfortable buying it back at under and even around book. So that's coming from, I think, from a long-term shareholder, but someone who really would love to see you guys start to actually become a little more proactive. Don't be so afraid of a tiny little level of debt. So I support the earlier comment that even going into your revolver to buy back $4 million or $5 million worth of stock would be, I think, greatly appreciated by the market and would be reflected in the share price. Operator: And our last question for today will come from the line of [ Brett Davidson ] as a private investor now. Unknown Attendee: I realize Greg has dropped off the line, but I'm hoping somebody can provide some level of update on the electric locomotive product lines and the manufactured diamond product lines. Wendy Diddell: All right. I'll start with that. So let's take the latter one first on the diamond. What we've seen there in that market, and I think again, everybody has read about is that, that market became very quickly saturated, oversaturated the synthetic diamond market. And as a result of that, we've seen a slowdown in the demand for those magnetrons that are used in the equipment that manufactures the diamond. When Greg referred earlier to some of the other elements of Green Energy Solution being down, that's one of them. So in that area, it's still out there. We're still selling them. It's just again, an overcapacity of equipment already on the market and certainly an overcapacity of the synthetic diamonds. All right, in terms of the EV rail market, I think Progress Rail recently put out some of its own press that they have recently shipped 2 of the large trains to Australia. So we're pleased to see that. You may recall in FY '23, we shipped a significant amount of batteries that are used in those trains. So we're going to sit back on the sidelines and see how those 2 trains perform in Australia and what that means for the future. On a more steady cadence basis, as I just referred to in my answer to Ross Taylor, is that we are now shipping on a regular run rate, the starter modules, and we expect to see some upside there. So in general, I would say that the EV rail market certainly is favoring more of a hybrid approach. This is outside of Richardson. This is the general market. More of a hybrid approach, but our starter modules, they are used in any train, whether it's diesel, electric or hybrid. So we remain optimistic about growth in that segment of the business as well. Operator: Thank you. And I'm not showing any further questions in the queue. I would now like to turn the call back over to Ed Richardson for closing remarks. Edward Richardson: Thanks, Victor. Well, thanks again for joining us today and for your questions during Q&A. We look forward to discussing our performance with you in April. And until then, please don't hesitate to call us at any time. Thank you very much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Good afternoon, and welcome to the Petco Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tina Romani, Head of Investor Relations and Treasury. Please go ahead. Tina Romani: Good afternoon, and thank you for joining Petco's Third Quarter 2025 Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco's Chief Executive Officer; and Sabrina Simmons, Petco's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. Joel Anderson: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results, where I'm pleased to share that we delivered another profitable quarter in line with our plan. We've continued to strengthen the foundation of our operating model, improved retail fundamentals and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability, increasing operating income over the last year by over $25 million, generating $99 million in adjusted EBITDA and more than $60 million in free cash flow. I want to thank our teams across the organization for their dedication, focus and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year-to-date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last 9 months as a collective leadership team, we've been building on that culture in 2 ways. First, through reinstilling retail fundamental discipline, which is driving increased financial rigor and accountability, this is a testament to how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go-forward values will be for a reimagined Petco and what that means for our customers and our plans to execute on our [ One Petco Way ] vision. We are squarely in Phase 2 of our transformation which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long-term value. At the same time, we are now strategically shifting resources towards Phase 3, a return to growth now that our bottom line has meaningfully been improved. Last quarter, I outlined the 4 pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation; second, delivering a trusted store experience; third, winning with integrated services at scale; and finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product and merchandise differentiation. I view this in 2 categories. On the consumable side, we have improved shopability with higher in-stock availability, our customers rely on us to have everyday go-to product, better integrated assortment planning and merchandising teams have been created an improved in-store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal and trend-driven buys. Previously, there has been a said-it-and-forget-it mentality, which is not a very aspirational shopping experience and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs-based business to also a wants-based business by overhauling our product offering and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot, our new My Human product line was expanded into over 200 stores. This is a small milestone but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next, moving to a trusted store experience. Joe Venezia, our Chief Revenue Officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet and taking costs out of our operations. He is now shifting his focus to additionally include revenue-driving KPIs like increasing transaction size, driving sales contests and increasing customer interactions. With our passionate partners, strong customer engagement and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time, passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores, freeing up our store associates to interact with customers and use what we call their superpowers of pet knowledge, improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest-growing category and is our competitive moat, given its in-person nature, high barriers of entry and difficulty to replicate, a holistic ecosystem between grooming, owned hospitals, clinics and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in 3 ways: one, improving utilization through increased staffing and appointment availability; two, improving engagement to enhance digital capabilities; and three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted 2 of our long-time leaders to chief veterinarians, reinforcing our commitment to growing our veterinary business. Simultaneously, we are fostering a culture of team development, top talent recruitment and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. We are standardizing processes across our fleet to secure in-store follow-up bookings. We are increasing efficiency for our refined grooming apprenticeship model, freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services, and center of store as the opportunity here may not be well understood. Historically, Petco stores and services operations were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history and make more informed diet recommendations based on overall pet health and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store, or recommend a store associate to assist. This is a simple example but illustrates how increased integration of services in stores can create a better outcome for pets and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed are enhanced digital capabilities, a more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements -- and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting and bidding strategies which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline, Where the Pets Go. I'm pleased with the progress of the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these 4 pillars will fuel our growth, which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco, and I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the year. As each quarter passes, we get better at celebrating amazing pet experiences, executing our strategies and delivering on our promises internally and externally. The initiatives planned for the fourth quarter will advance the Petco transformation, and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners who puts pets first every day and boldly reflect who we are and what we stand for. Our Petco Love foundation has demonstrated our long-standing commitment to saving lives, finding loving homes for over 7 million pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina to take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? Sabrina Simmons: Thank you, Joel. Good afternoon, everyone. In the third quarter, Petco once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Petco's economic model has been our top priority. I'm pleased with our progress, as demonstrated in our expanding gross margin, expense leverage and operating margin expansion, not only in the quarter but year-to-date. In line with our outlook, which reflects our decision to move away from unprofitable sales. Net sales were down 3.1%, with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional 9 net store closures year-to-date. We ended the quarter with 1,389 stores in the U.S. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost, including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG&A. For the quarter, SG&A decreased $32 million below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset an increase in rigor around expense management is evident in our results. Savings were achieved across the board and especially in G&A areas. Notably, marketing spend was about flat year-over-year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over 170 basis points. Adjusted EBITDA increased 21% or $17 million (sic) [ $17.3 million ] to $99 million (sic) [ $98.6 million ] and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in-stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61 million, and year-to-date was $71 million. Both the quarter and year-to-date were significantly above the prior year. Notably, year-to-date cash flow from operations has nearly doubled versus the prior year to $161 million. We ended the quarter with a cash balance of $237 million and total liquidity of $733 million including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $395 million and $397 million, an increase of roughly 18% year-over-year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between 2.5% and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 million and $95 million. It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year-to-date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for Phase 3, a return to profitable sales growth. With regard to other guidance items. For the full year, we expect depreciation to be about $200 million, net interest expense of approximately $125 million, about 20 net store closures and $125 million to $130 million of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change, and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. Operator: [Operator Instructions] The first question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: Let me -- I was intrigued by something you talked about some of the wants. Can you talk about -- can you frame what mix of the business is wants versus needs today and it may be far out there but what's the vision? And my guess is the wants aren't truly wants. I think it's -- given your background, there's probably some unique merchandising that's partially wants but curious how you can frame that and maybe tease it out a little. Joel Anderson: Thanks, Simeon. It's a great question. And yes, if you think about it in the traditional sense, consumables is traditionally a needs business. And it's the overwhelming majority of our business but even that business, Simeon, I think, has some elements to it that can be more of a want in principle. And what I mean by that, and I alluded to it in my prepared remarks, we've just had this said-it-and-forget-it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, we our dog food business was largely all surrounded around 1 big episodic reset in the middle of the year. And we're really going to change that in '25, and as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions, we're going to roll that out in line with their timing, not our timing. So that's going to make more of a perception of wants rather than just needs in the sense that somebody walks in and -- is a sense of discovery and we just haven't been good at that in the past, Simeon. So I think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business which is traditionally probably the way you were thinking there's an element to it in consumables as well. And certainly, when we get on the call in March, we'll go through that in more detail. I cut you off, Simeon. Simeon Gutman: No, I cut you off. My follow-up, it's related. You talked about integrating the store functions. You talked about wants versus need, and then there was a little bit of maybe forward investing, I think, Sabrina just mentioned. So if you -- and by the way, the business itself is getting close to lapping like whatever tough compares. It seems like it's naturally getting back to positive territory. So what kind of clicks or what's the priority among the things we heard where the top line starts to move or? Is it something we haven't heard yet? Joel Anderson: No, I don't think it's something you heard. I think, look, we're going to approach 2026 from the top line, the same way we approached 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line, and then we executed them in 2026 -- in 2025. We're doing the same thing for top line growth. I outlined 4 pillars. We backed it up with building blocks which I talked about many of them today. And then we're going to execute against those with the same rigor and discipline. And so it's not just to cross your fingers and hope. We've got plans around 4 pillars with a lot of building blocks for each 1 of them. And I'm really excited about all 4 of them. I alluded to some of them that we're already testing here in Q4 but all of them are making traction and some just take longer to implement than others but teams are all focused and we got a good plan. Operator: Next question will come from Oliver Wintermantel with Evercore ISI. Oliver Wintermantel: Joel, what is the realistic time line for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? Joel Anderson: Yes. Look, I'm not going to get into 2026 today on this call and the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1 but we'll give you an outlook on the full year. But specifically, I can tell you all 4 of the pillars I went through today are getting traction. And -- so I would expect all 4 of them to contribute towards comp in 2026, and then we'll just outline the timing for you on the March call. Oliver Wintermantel: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year-to-date and in the quarter. But how much of the Q3 working capital improvement is sustainable, and what financial or operational levels continue to support the cash generation for next year? Sabrina Simmons: Yes. I mean, I think we view cash flow and all of its levers as continuous improvement. So we certainly are focused on continuing on this path of generating strong free cash. The principal lever of core solver is net earnings. So we're going to continue to focus on our bottom line and growing net earnings. We'll continue to focus on inventory discipline. We're not done. We've made huge strides this year. in terms of rationalizing our SKUs and reducing our inventory compared to our sales which is fantastic. But I wouldn't say we're best-in-class in turns yet. We still have a lot of opportunity, so we'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. Operator: Question will come from Michael Lasser with UBS. Michael Lasser: Can you size the magnitude of the potential investments that you would make in what form those are going to come in, whether it's labor, marketing or promotions? And are those investments necessary as you look to 2026 in order to drive top line growth. Sabrina Simmons: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels -- he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this has afforded us, as I said, the option, and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options certainly, marketing, certainly looking at labor. And sure, we'll always continue to look at promos to see if we can do them effectively in a way that brings value to our customer but also in a way that's very responsible as we continue to manage our margin expansion. Joel, do you want to... Joel Anderson: Yes. Yes, Sabrina, I think you nailed that pretty good. And when Michael, I look at the 4 pillars, we outlined. I don't think any of them as it relates to 2026 require any substantial step change from what we're doing today in terms of cash investment or a change in OpEx investment or something. It's really -- you take merchandise, like we're selling through our existing merchandise and we're buying into new. So that's really just a steady flow change and really don't see any episodic change in 2026 from an investment standpoint from the run rate we're already on today. Michael Lasser: I guess the question and the critical point is can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and be on that path next year? Sabrina Simmons: Yes. If I'm hearing you, Michael, and I might want you to repeat the question, but we for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage on expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're very aware that we need to make some investments. That's why we're talking about in Q4, we may make some of those investments in advance of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said, we never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment and we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. Michael Lasser: Sabrina, could I just clarify? If we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco has experienced over the last couple of quarters. It looks like the pace of improvement is going to moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in the fourth quarter? Is that how we should think about quantifying that potential investment? Sabrina Simmons: I think that's a fair framework, Michael. I would add to that, as we look to Q4, as I stated, remember, when we think about gross margin, there's more tariff impact. So that's just 1 factor. It's not enormous as we said all year. It's -- we're pleased that we're in a retail sector that doesn't have mountains of tariffs but it is an impact. So that's 1 factor. The second impact is that investment that we're talking about, and how much we will choose to do and how we'll manage through that in the fourth quarter. So yes, I think your statement, broadly speaking, is fair. Operator: Next question will come from Kendall Toscano with Bank of America Global Research. Kendall Toscano: Hopefully, you can hear me okay. I was just wondering if you could talk more about the impact of tariffs during the quarter. I know you mentioned they became more meaningful in 3Q but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any, and then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Sabrina Simmons: Yes. Thanks, Kendall. Just to go back to your statement. So the first time we saw a tariff impact flow through our P&L through cost of goods sold in any meaningful way is the third quarter because the second quarter has like, let's call it, de minimis, amounts of that. We had it on our balance sheet, we had an inventory buys but it wasn't flowing through COGS yet. The third quarter is the first quarter of that. And my only point was, in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially the tariff headwind is a bit more meaningful. But again, in the broad spectrum of things, it's a very manageable number which we've managed all year and have been revising guidance upward in the face of it. So I think that hopefully helps frame it up. We also know that it's mostly in the private label supplies area, as we've said in the past. So hopefully, that helps frame it up, too. Kendall Toscano: Got it. That's helpful. And then my other question was just in terms of some self-inflicted headwinds in the Services segment as you've deprioritized that program ahead of the planned relaunch. Just curious, as you're now getting closer to relaunching that in 2026, and it sounds like maybe starting to pilot it in the fourth quarter, what kind of tailwind would you expect to see on same-store sales growth or, I guess, just services growth? Sabrina Simmons: I think you mean our membership program? Kendall Toscano: Yes, that's what's I meant. Sabrina Simmons: Yes, that's what combined with services in the way we report services and others. So probably, Joel, if you want to start with the membership program and... Joel Anderson: Yes, because our paid membership rolls into there. But I think the more important thing to take away from that is -- and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end-to-end testing in several markets. And so -- we really haven't seen any major glitches in fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and to roll out the new marketing attached to it and are still on track then for a rollout sometime in 2026 with the rest of the fleet. But membership so far has really come together nicely, and it's a really important element to our growth that's going to begin in 2026. Sabrina Simmons: Yes. And since you raised it, Kendall, on the services piece, I think you can see that, that continues to be not only a strategically important area for us but it's also an area of nice growth and continues to be. Operator: Next question will come from Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask a little bit more of a higher level question. Just your view on where you think the industry is now from a digestion standpoint where you think the industry can grow in 2026 if we do return to growth in '26 for the industry? And just what you may have been seeing out of the competitive set this most recent quarter as some of these higher tariff costs and prices have come through? Joel Anderson: Yes. Thanks, Kate. Look, overall, the competitive set really hasn't changed much from the last quarter. I would say, the -- what's changed is the consumer has been probably a little bit more cautious. I mean, obviously, with tariffs and political tensions and interest rates still high that's really been bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it's been pretty stable, flattish in terms of growth I think the progress we've made on our digital side has really been promising and that will be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is -- Sabrina just talked about is already growing, and that is an area of growth in the pet industry, and then we'll layer in the focus we've made and the progress we've made on our digital improvements. But overall, it's pretty stable. Operator: Question will come from Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first 1 I had was just hoping to -- now the cash -- free cash flow profile has improved. How do you think about prioritizing the usage of cash? Is it continued debt paydown. Do you think about reaccelerate veterinary practices? Just curious how you think about that over the next few years. Sabrina Simmons: Yes. Our first priority would always be to invest in our business to sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our books already that really are ramping up now, vet hospitals predominantly the #1 on the list that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those, and we, in fact, you'll hear us talk about more in the Q4 call, Chris, we have a set of those that where we're going to focus on bringing utilization up in 2026 as well without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So of course, though, we'll be looking at pockets and areas as we move forward and we finalize what kind of remodel prototype we want to land on how we'll start to bring those into our system. But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big, enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that, beyond that priority to first invest in our business, the second, of course, is we are always looking, as I stated, on the first call when I talk to you guys, we want to bring down our leverage on an absolute basis. We also want to bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over 4x debt to EBITDA. And if we hit the midpoint of our new guidance, we should be below 3.5x net debt to EBITDA. So quite a bit of progress. And indeed, we'll look to opportunities to even potentially do some opportunistic debt pay down. Christopher Bottiglieri: Got you. That's really helpful. And then your gross margins were, I think, down 20 basis points on the product line. Is that primarily that tariff headwind you're referring to? Or is it also somehow -- or is like -- is the elasticity offsetting the ticket increase and there's also a headwind on top. Just curious by like tariff headwinds that you're referring to there where it's manifesting? Sabrina Simmons: I have our merch margins expanded both in our products and services. Christopher Bottiglieri: Sorry, I meant quarter-on-quarter, not year-on-year. Sabrina Simmons: Oh, quarter-on-quarter, sure. Yes, I would say that is primarily a little bit of tariff headwind coming in. Year-on-year, though, we are up in both products and services. Operator: Next question will come from Steve Forbes with Guggenheim Securities. Steven Forbes: Joel, you spoke about services in stores coming together. And I guess my question is, can you help us frame up sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store-only customer or vice versa? Like any way to sort of talk about how like the net sales per customer evolves as they broaden their engagement across the store? Joel Anderson: Yes. Look, look, I think any great bricks-and-mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely 1 of our moats, right? It's 1 of our key elements that is really hard for any other pet retailer to replicate in the way we built out grooming, hospitals, vet clinics, dog walking, dog training, all those elements. And so that's obviously an area there for we've leaned in the most, and we've made incredible progress with our existing assets, utilization we've improved, engagement improved. And then what you're getting at is the integration with the center of store with product. And so -- what's key to all that, Steve, as I look to '26 is layering that in with a membership program that really helps us better understand the profile of each 1 of our customers, how many are you using services? How many use services and merchandise, how many are buying in-store and online. And you put all those elements together, it starts to create profiles of different customers. And we really see -- honestly, the better we get at services, the halo effect that has on the overall business just gets stronger because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress, pleased with the results we're seeing there. And you'll continue to see us talk about that and -- but that gives you a little color on how I see it playing out turning into 2026. Steven Forbes: And then maybe if I just do a quick follow-up on that. Is there any way to set the baseline here on just sort of what percentage of your customers today actually buy services or any sort of baseline KPI that we can sort of begin to track as we think about your progression in the business? Joel Anderson: Yes. Look, I think at this point in time, I'm not going to get into the specifics on it at that level of detail. I mean, I think the baseline KPI to track as we look into the future, it will be transactions overall and then let us manage it at the different elements we have to serve up to the customer. But services will definitely be a key component to it, Steve, as we keep growing. Operator: Last question will come from Zack Fadem with Wells Fargo. Zachary Fadem: Is there a way to quantify the impact of moving away from less profitable sales and deemphasizing the member program in Q3. As it seems like you expect your Q4 comp to step down a bit more. I'm curious to what extent you're expecting those items to also impact Q4? Sabrina Simmons: Yes. I mean I'll just start by -- it's a pretty broad range, Zack, the implied Q4, so we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins, walking those unprofitable sales and building this very strong foundation upon which to start sales growth in 2026. But Joel, I'll let you take it from there, if you want to... Joel Anderson: Yes. I think -- Sabrina, I think you nailed it. And I think I'd add to that, like you asked what's the impact? Well, the impact you're seeing quite clearly is we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we -- I think we've done a really nice job of identifying which sales are really onetime transactions and our empty calorie as I call them, versus which customers we want to grow lifetime value and be with us for the long term. And so you've seen that play out quarter after quarter for us as sales have been down consistently low single digits but bottom lines continue to improve. So as each quarter goes by, we get better at identifying those, largely, getting them out of our base. And you layer in a membership program, more strategic media buying aspect and all that will start to lead towards improvement in the top line with the bottom line as well. Zachary Fadem: Thanks, Joel. And then just to level set as we look ahead to 2026, I mean the expectation is to return to sales growth. I'm curious how generally you would frame broader category performance in dog and cat food, supplies, services, et cetera, and then how you would layer in the impact of both your initiatives? And then net store opening and closings to kind of get to that total sales growth? Joel Anderson: Yes. Look, I think it's too early now to spell that out specifically for 2026. I mean, clearly, if you look at what we published, you can see the consumables and supplies are negative this year and we're getting growth in services. We expect a return to growth in consumables and supplies going forward. And what I've got to just outline for you or translate for you is what I laid out today in terms of 4 pillars, how does that translate into growth at what time and what period next year. But a lot -- what you guys can't see is all the progress we're making here internally. And then we just got to put the pieces together for you so you can help you think about your model. But we haven't -- I think I answered on a few questions before. We're approaching '26 the same way we approached '25, outline the strategies and then execute. And the team is just getting better at that as every passing quarter goes by. Sabrina Simmons: Yes. And Zack, just to emphasize what Joel is saying, for sure, I think your thinking is in line with ours, where you always look at what's your base sales build, then we layer on all the many initiatives, which Joel has been outlining and we'll continue to get more granular as we go into '26 but we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And again, the 2025 expectation is about 20 net store closures. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tina Romani for any closing remarks. Tina Romani: Perfect. Thanks so much, Joel and Sabrina, and thanks, everyone, for your time. That concludes our call, and we hope everyone has a wonderful holiday. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to BJ's Wholesale Holdings, Inc. Third Quarter Fiscal 2024-'25 Earnings Conference Call. [Operator Instructions]. I now pass the call over to our host, Anj Singh, VP of FP&A. Please go ahead. Anjaneya Singh: Good morning, and welcome to BJ's Third Quarter Fiscal 2025 Earnings Call. Joining me today are Bob Eddy, Chairman and Chief Executive Officer; Laura Felice, Chief Financial Officer; and Bill Werner, Executive Vice President, Strategy and Development. Please remember that we may make forward-looking statements on this call that are based on our current expectations. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say on this call. Please see the Risk Factors sections of our most recent SEC filings for a description of these risks and uncertainties. Please also refer to today's press release and latest investor presentation posted in our Investor Relations website for a cautionary statement regarding forward-looking statements and non-GAAP reconciliations. And now I'll turn the call over to Bob. Robert Eddy: Good morning. Thank you for joining us to discuss our third quarter results. Our business delivered strong results in Q3 and performed well in an incredibly dynamic environment. Once again, we gained share and grew traffic, marking the 12th consecutive quarter of market share growth and the 15th consecutive quarter of traffic growth. These consistent results are a testament to the value that we provide to our members each day as we are guided by our purpose of taking care of the families who depend on us. This purpose has never been more relevant as many of our members are dealing with a considerable level of unpredictability in their everyday lives. This has impacted consumer confidence, which has been at low levels for much of this year. And we are taking these conditions as a call to action to lean even further into value for our members' everyday needs. Some of our actions include incremental offers to those members that may need a little bit more help in the current environment. In addition, we're rolling out reduced delivery fees to make our most convenient shopping channel even more accessible. The combination of value and convenience is a powerful unlock for us, and this will help our members realize even more value from their BJ's membership. We've also launched a 10% discount for our team members as a way of thanking those who are on the frontlines living our purpose every day. For the quarter, we delivered merchandise comparable comp sales growth of 1.8% and adjusted earnings per share of $1.16. It's helpful to evaluate the performance on a 2-year stack basis to normalize for the impact of last year's port strike and hurricane activity. Our 2-year stack comp was 5.5%, an acceleration of nearly 1 point versus the first half. Our Q3 comp performance was evenly balanced across our 2 reportable divisions. Our perishables, grocery and sundries division grew comp sales by 1.8% with a 2-year stack that accelerated sequentially of 6%. The investments we've made in both Fresh 2.0 and our category management process have driven continued share gains across our consumables franchise. We saw the most strength in perishable categories such as fresh meat, dairy and produce, aided by our Fresh 2.0 investments. We also saw strength in nonalcoholic beverages and candy and snacking, driven by enhanced assortment and more prominent placement in our clubs. Our general merchandise and services business also grew by 1.8% on a comp basis in the quarter. Consumer electronics comped in the high single digits on success in computer equipment and tablets. Apparel, which we've highlighted on several recent calls, continues to grow, comping in the low single digits. The offsets we saw this quarter were in home and seasonal, which continued to be impacted by lower discretionary demand and consumer confidence, as well as some of the decisions we made earlier this year to tighten our inventories in light of the anticipated impact of tariffs. Our services business also contributed to the improved performance in this division during the quarter. Looking at the behavior of our membership base this quarter, we continue to see members across all income levels remain cautious, which tracks with what we broadly see in the consumer confidence data. We saw members exhibiting value-seeking behavior, including higher sensitivity to promotions, increasing purchasing of private label items and some trade down. For example, given the high price of beef, we saw higher purchasing of ground beef versus more expensive cuts. Despite this type of behavior, member trends exhibited stability quarter-over-quarter across all cohorts when adjusting for the noise from the port strike. While value-sensitive members remain more exposed to the macro backdrop, we did not see any incremental pullback from them. That resilience reinforces BJ's position as a trusted destination for strong value and convenience when it matters most. The environment continues to move quickly, but our teams haven't lost sight of the fundamentals. By zeroing in on our controllables, they're advancing our strategic agenda, increasing member stickiness, making our clubs better places to shop, expanding convenience and growing our physical footprint. These elements are central to creating value over time, and we built further momentum in each this quarter. I'll now provide an update on how those pieces are evolving. Our membership results continue to be robust, and we grew membership fee income by nearly 10% this quarter, driven by strong member counts, mix benefits and the effects of our recent fee increase. We expect the growth rate to show further improvement into the fourth quarter and to once again deliver a 90% tenured renewal rate for the full year. The core of our membership health is driven by growing the number of members as well as improving the mix of those members. In the third quarter, our higher tier membership penetration reached another new record, improving by 50 basis points sequentially. And we continue to see more opportunity to push here. We would not be able to deliver sustainable membership growth without parallel improvements in our merchandise. We are launching many new owned brands products, which are aimed at improving the member experience by offering excellent quality at an unbeatable price. Some of the products we are excited about include Wellsley Farms branded tortilla and potato chips, protein shakes, frozen poultry and coffee pods. This is just a small list of many new high-quality products that we plan to launch at amazing price points. Owned brands products have a multitude of benefits as they are typically priced at about 30% below national brands while offering comparable quality of national branded items. This gives our members even more compelling value for their hard-earned dollars, which in turn drives loyalty and higher lifetime value. Owned brands products also deliver higher penny profit for us, which we can use to invest back into the member experience, further propelling the flywheel that drives our business. We're excited to see how our customers respond to our improved offerings. Our efforts to continue to improve the convenience of shopping our clubs can be seen in the digital growth of 30% this quarter and 61% on a 2-year stack basis, driven by strength in BOPIC, same-day delivery and ExpressPay. We're looking to further drive innovation by utilizing AI to deliver enhanced content highlights and attributes, making shopping even easier for our members. We also recently beta launched an AI shopping assistant and personalized member shopping lists, and we're looking forward to taking these live to our members soon. Last but not least, our new club footprint expansion. We opened our club in Warner Robins, Georgia during Q3. And just last week, we opened our fifth Tennessee club in Sevierville. I'm pleased to report that both clubs are off to a great start, joining the class of 2025 clubs that have outperformed expectations, with membership counts 25% ahead of plan. The community reaction at all of our recent openings has been nothing short of phenomenal, and we are proud to serve these communities. Our expansion strategy has been a sustained and accelerating success, with clubs opened over the last 5 years delivering comp performance about 3x the chain average. On deck for new club openings, our Springfield, Massachusetts; Sumter, South Carolina; Casselberry, Florida; Chattanooga, Tennessee; Soma, North Carolina and Delray, Florida. That will make 14 new clubs for the year, the most we've had in many years. We remain on track to add 25 to 30 new clubs in 2 years, and our pipeline of new clubs is as large as it has ever been. Speaking of our pipeline, we are excited to announce 2 more 2026 openings in Foley, Alabama and Mesquite, Texas as well as a relocation of our club in Rotterdam, New York. Mesquite will be our fifth Dallas-Fort Worth Club opening in 2026. We've been impressed with the warm welcome we've received as we've introduced the BJ's brand to the market over the past few months, including our Friday night life sponsorships, which was capped off with South Grand Prairie taking home the trophy and the [ Prairie Bowl ] sponsored by BJ's Wholesale Club. The enthusiasm we've seen in these new markets has been awesome, and we can't wait to bring the value of BJ's Wholesale Club to Texas families early next year. As I look at our business, I see improving momentum. Our membership is growing in size and quality. We are making improvements in merchandising and continue to capitalize on the convenience of our digital offerings. And as I just said, our footprint expansion is accelerating and successful. While the short term may be somewhat unpredictable, I'm confident that our company is in an excellent position to deliver value to our members and make good on our commitments to shareholders. We will continue to act with purpose in building our structurally advantaged business for the long term, and you should continue to expect that we will run the business with lifetime value at the core of our actions. Before I turn it over to Laura, I want to thank our team members. Your dedication to serving the families who depend on us and your commitment to supporting one another make BJ's a great place to shop and a truly special place to work. I'm proud of all that we are accomplishing together. Laura Felice: Thank you, Bob. I'd like to start by recognizing the outstanding efforts of our team members in our clubs, at our club support center and throughout our distribution network. Your hard work and commitment to serving our members and communities are instrumental in delivering a solid quarter and advancing our long-term growth agenda. Let's look at our third quarter results. Net sales for the quarter were approximately $5.2 billion, growing 4.8% over the prior year. Total comparable club sales in the third quarter, including gas sales, increased 1.1% year-over-year as the average price of gas declined mid-single digits year-over-year. Merchandise comp sales, which exclude gas sales, increased by 1.8% year-over-year and by 5.5% on a 2-year stack. We are pleased to grow traffic and units in the quarter. This quarter, we lapped the surge of business brought by last year's port strike. At this time last year, we estimated it to have contributed about 1 point of comp in September. Moving to this year, September was by far the weakest month as we comped the strike, with August and October generally performing in line with our expectations. We believe it may be helpful to evaluate trends on a 2-year stack basis to assess the business, and I'll reference this metric in my overview. Our third quarter comp in our grocery, perishables and sundries division grew 1.8% year-over-year with a 2-year stack of 6%, showing slight acceleration versus the first half. Our general merchandise and services division comp also increased by 1.8% in the third quarter with a 2-year stack of about 2%, an improvement versus the declines seen in the first half. As Bob noted earlier, traffic and market share grew again in this quarter, and we experienced approximately 1 point of inflation. Digitally enabled comp sales for the third quarter grew 30% year-over-year and 61% on a 2-year stack. Our digital businesses performance is an affirmation of the values our members find in the improved and dramatically more convenient shopping experience. We find that the members that engage with us the most digitally and utilize all of our offerings, end up being the most valuable members with the highest lifetime value. We will continue to invest in our digital capabilities to gain even more wallet share of our members. Membership fee income, or MFI, grew 9.8% to approximately $126.3 million in the third quarter on strong membership acquisition and retention across the chain. We also continued to benefit from the fee increase that went into effect at the beginning of the year. Our underlying member growth remains healthy, and we continue to improve the member mix. Moving on to gross margins, excluding the gasoline business, our merchandise gross margin rate was flat on a year-over-year basis as we continue to invest in our business and in our members, along with execution towards our longer-term objectives. We expect to continue to invest in Q4 and beyond as we lean into our purpose and do the right thing for our members, which will be the right thing for us in the long term. SG&A expenses for the quarter were approximately $788.2 million and deleveraged slightly as a percentage of net sales year-over-year. Adjusting for the legal settlement benefit that we realized last year, SG&A as a percentage of net sales was about flat year-over-year. We continue to grow comp gallons and gain share in our gas business. Our comp gallons in the quarter grew 2% year-over-year, a nice improvement versus Q2's flat performance and again significantly outpaced the industry, which declined low single digits on a comp basis over the same time frame. We have been in a much less volatile gas margin environment this year with profitability just modestly ahead of our expectations in Q3. Our third quarter adjusted EBITDA was down about 2% year-over-year to $301.4 million, owing largely to lapping the benefit of a legal sentiment last year. Adjusting for the settlement, adjusted EBITDA grew approximately 5% year-over-year on higher top line and strong cost discipline. Our third quarter effective tax rate was 26.9%, slightly lower than our statutory rate of approximately 28%. All in, our third quarter adjusted earnings per share of $1.16 decreased approximately 2% year-over-year due to the legal settlement. Adjusted earnings per share grew approximately 8% year-over-year, normalizing for the settlement benefit last year. Moving to our balance sheet, we ended the third quarter with total and per club inventory levels down 1.5% and 5% year-over-year, respectively, while our in-stock levels increased by 90 basis points. Note that we are operating 9 more clubs in our chain compared to a year ago. The favorability in our inventory investment continues to be related to reduced inventory buys. I am proud of our team's hard work to stock even more of our merchandise our members want while improving the operating efficiency of our business. This is yet another driver of the flywheel, with which we can pass along even more savings to our loyal members. Our capital allocation strategy remains consistent. We believe profitably growing the business is our best use of cash and investments to support membership, merchandising, digital and real estate initiatives will continue to be funded by our cash flows. We ended the third quarter with net leverage of 0.5x. Share buybacks are a key component of our capital allocation framework. And in Q3, we took advantage of the lower share price and repurchased approximately 905,000 shares for $87.3 million. As of quarter end, we have approximately $866 million remaining under our recently renewed repurchase authorization. We will continue to take a disciplined and balanced approach to deploying our capital to maximize shareholder value. Looking ahead to the remainder of the year, we are confident in the momentum of our business and our ability to deliver sustained growth, especially in an uncertain economic backdrop. Our teams are focused on controlling the controllables while executing towards our long-term objectives. With regards to guidance and as we have been speaking to on this call, the macro environment is challenging. We have made decisions to be prudent with inventories in the face of this environment, challenging our ability to grow general merchandise sales. We made that choice in order to allow continued investment in member value in the rest of the business. While it will hamper sales in the short term, we remain confident that this was the right decision. With that in mind, we are narrowing our guidance for the full year merchandise comp sales to a range of 2% to 3% for the full year. We are also increasing our range of expected adjusted earnings per share to be $4.30 to $4.40. The actions we've taken to support stronger, more sustainable growth are working, and our long-term roadmap is solid. With a resilient business model and clear strategic direction, we're well equipped to keep building on our success and deliver substantial value to our shareholders in the years ahead. Bob, back over to you. Robert Eddy: Thanks, Laura. As I noted earlier, we are making progress in building momentum. We're elevating the quality of our membership base while it grows. We're curating a stronger, more relevant assortment at prices that reinforce our value promise. Our digital tools are improving member experience, and our expansion strategy is bringing the BJ's model to new high-potential markets. Looking forward, our commitment doesn't change. We will keep living our purpose and focusing on the people and communities who rely on us every day while executing on the long-term priorities that drive our growth. Thanks again for joining us today and for your support of BJ's Wholesale Club. We will now take your questions. Operator: [Operator Instructions] Our first question comes from Peter Benedict of Baird. Peter Benedict: I wanted to ask about some of the income demographics and the behavior. It sounded like it was relatively stable. And I think we're hearing a lot this week about kind of that lower and facing some struggles. Can you remind us maybe your exposure to maybe the SNAP program, talk about the renewal rates you're seeing maybe across these income demographics, just anything further below the surface in terms of behavior across income demographics, both in the third quarter and then as you're kind of entering here into the holiday season? Robert Eddy: Pete, maybe I'll kick this one off, and Laura can add to it if she sees fit. Our prepared remarks tried to tackle this question because we knew it would be out there. Certainly, everybody is concerned about the low-income consumer. The continued inflation provides clear pressure on that segment of all consumers and certainly that segment of our members. With that said, removing the noise from the port strike and the hurricanes and stuff last year, we saw their performance in Q3 as being pretty resilient. The purchasing habits were very stable, and we're pleased to see that. There certainly was a lot of noise at the end of the quarter and the beginning of the fourth quarter around the SNAP program and the government shutdown. I guess, I would say there was a slight disruption in the end of Q3, a more meaningful disruption in the opening days of Q4. But now that, that program is back on track, we're recovering. Those participants as they get access to their benefits are choosing to come to see us and -- as they have more opportunity to spend. So we're encouraged by that showing from those members and from the members in the medium- and high-income cohorts that we saw during the quarter as well. And maybe one final point. We're also encouraged, going forward, by the administration's help recently on the tariff front and reducing the cost of things that are not made or grown in the United States. And so that should be helpful to all consumers, but most pressingly, the low-end consumers that you referenced. Laura Felice: Yes, I think I'd just add on top of it from a membership perspective, we're really proud of our member -- our continued membership results throughout the year. We are acquiring members in our existing clubs, so comp clubs in our new markets and our new clubs that we've opened at the beginning of this year. And there isn't anything, when we look at the details of membership to your question about kind of cohorts, that looks different. We're acquiring members across all the cohorts. And so we're really happy with our continued strength from a membership perspective. Operator: Next question comes from Kate McShane from Goldman Sachs. Katharine McShane: We wanted to ask if you believe that the right long-term same-store sales growth for this business is in the 3% to 4% range. If so, why? And what do you think is holding you back from achieving this comp over the last several quarters? Robert Eddy: Kate, as you know, we've been transforming our business over the last several years with the idea of really four things: one, growing and maintaining a stickier membership; two, improving our merchandising; three, improving our convenience through digital; and then finally, increasing our footprint through real estate expansion. And as we talked about in the prepared remarks, all those things are heading in the right direction. Certainly, the things that we're doing sometimes conflict with what happens in the outside world. We certainly have the luxury of competing against great competition, and it's certainly been a choppy economic backdrop out there. So we have tremendous confidence in our long-term ability to grow this business from a top line perspective. We're showing signs of that in all four of those pillars. And we'll continue to work on each of those to get to that point. The thing that we try hardest to do, obviously, is put the right products on the shelf at the right value. And we made tremendous strides, I think, during Q3 to do that. Our merchandising team has put a lot of effort this year into that idea of greater products, greater values. And we made considerable investments in Q3 with that in mind. We'll continue to do that because that's what we believe wins. Value and convenience are really what we're after for our members. And we'll keep plugging. We're very optimistic in our long-term aspirations. Katharine McShane: And if I could just follow up with one question, you just mentioned the competitive environment. We were curious about what the competitive response has been when you open in some of these new markets, particularly Dallas, which has a really strong grocery offering and other club offering already. It sounds like things are going well there, but I wondered if you had any more details with the fifth store opening? Robert Eddy: Sure. The real estate growth story, and I'll let Bill talk about it since he is the architect of it, is a great one. It's certainly a continuing, sustained success and getting even faster with 14 clubs this year in lots of great markets. Those clubs are doing really well. And so we're very enthusiastic about this ability to grow our company. And we've been received well in the markets that we've entered. So why don't I let Bill talk a little bit more about it? William Werner: Kate, I think as Bob mentioned, we're really proud and excited about the success of the new clubs this year thus far and what's left to come for this year. And then as we look forward into Dallas next year, the prospect of going in and winning in that market is really important to the team. We've talked about it a couple of times on these calls that the culture that we've built around new clubs is really important. And the team is actually at a high level. As we look back at this year so far, I think 2025 will go down as the best class of new clubs. As far back as I can remember, with the success we've had with our 8 openings to date now and 6 more to go for the rest of the year, what we're seeing so far in those new clubs that haven't opened yet with preopening membership and the engagement of the community, we know that they're going to be outperformers as well. And so as we take that momentum from this best class of openings into next year into Dallas, combined with the work that we've done in the market of raising awareness for our brand and engaging with the community, we have a ton of confidence that not only will we compete, but we'll be in a position to have great success there. Operator: Our next question comes from Robby Ohmes from Bank of America. Robert Ohmes: I wanted to follow up on the inventory positioning that Laura talked about. I just wanted to understand how you're thinking about that for the fourth quarter. Is it the positioning that sort of limits sales upside, but supports margins? Just how -- what's the pluses and minuses of the tight inventory and semi-related Fresh 2.0 was like a great tailwind in comp driver, the benefit, the tailwind has slowed here. Is there anything that can reaccelerate? Is there a Fresh 3.0 or something like that, that's in the work here to kind of get that to reaccelerate? Robert Eddy: Robby, maybe I'll take a shot at starting off, and Laura can fill in. I think what you're referencing is Laura's comments around proactively managing our general merchandise inventory. When we were in the beginning part of the year, I'm trying to understand where prices would go and costs would go as a result of tariffs, we made some proactive decisions to manage potential markdowns to allow us to fund greater investment in overall value for our members. And I think that was the right decision. I think you want us to do that every day. That is really why we're here. We've taken those dollars and in fact, invested them across the rest of the business. In Q3, significantly reduced pricing on own brands water, on several other beverages, on some paper products across our produce assortment. So we are really trying to balance those two things. And so we do have a more conservative inventory position from a general merchandise perspective, that was true in Q3. It remains true for the fourth quarter. And I do think it will limit the upside of the general merchandise business, but again, allow us to continue investing for the overall value for our members. I think the other story within inventory is really an absolutely terrific performance in managing the overall inventory levels of the company. The team has done a really masterful job in the whole business to have our in-stock rates go up 90 basis points into inventories that are down. We are doing a much better job allocating inventory throughout our chain, making sure that things are where they need to be, when they need to be there and to be in stock for our members every day. We need to keep turning that handle and get better and better every day, but I couldn't be more proud of the team to make a performance like that happen. Anything else, Laura, on inventory? No? Fresh 2.0, I think it was another terrific program, continues to yield benefits. You know that started out in our produce business. We had terrific produce results during the quarter again. And what you're seeing from the perishables business overall is some of the reduced benefits from egg inflation and things that are offsetting some of that great performance. So with that said, we've talked about the next iteration of Fresh 2.0 and call it what you want, 2.1 or 3.0. We have made another set of considerable improvements in meat and seafood. And we're looking to doing the same in bakery and other categories as we go forward. The mission there is the same, right? Our best members interact with us in these categories. If we can show them the greatest product, the freshest product at compelling value, is displayed in a way that is compelling, freeing our team members so that they are experts in all these disciplines; we can provide a better experience for our members, get more people into those categories and grow the overall traffic of the business. That is certainly the result that we saw from Fresh 2.0 in the produce segment. The early returns on meat and seafood are good as well. And so we're very optimistic about that program and its ability to drive sales within those categories, but also to get to that further bigger goal of driving traffic in the whole business, which obviously drives lifetime value. So some of these investments are expensive, but they're very much worth it in terms of driving the top line and the overall value of membership to BJ's. Operator: [Operator Instructions] Our next question comes from Steven Zaccone from Citi. Steven Zaccone: I wanted to ask about the implied fourth quarter same-store sales because you referenced in the release that you've also seen some holiday momentum -- or excuse me, momentum to start the holiday season. Can you just talk through your category assumptions in the fourth quarter? And then, how you think about low end versus high end of the range? Robert Eddy: Sure. Again, maybe I'll start, and Laura can fill in, Steve. We certainly, I think, had a good performance in the third quarter. I keep using that word resilient. But into the face of the port strike and the hurricane activity and all that stuff, our sales were a bit higher than we thought they might be in the range of outcomes. And the team's preparation for the holiday season, I think, has been fantastic. We've been investing in value, we've got incremental promotions out there, we're continuing our really successful Free Turkey promotion, where if you spend $150 in 1 basket, you can get a free turkey for your family for Christmas. We're doing a lot of these things to really build on the momentum we saw in Q3 and get our members in our clubs and make them happy. With that said, it's a choppy economic backdrop out there, right? We talked about the low-end consumer at this point. And we certainly have a little bit of a harder hill to climb from a comparative perspective, we had a good Q4 last year. But net-net, while it's a wide range of outcomes that can happen in any quarter, most notably the fourth quarter, we are cautiously optimistic about our ability to put up some good numbers in the fourth quarter. Laura Felice: Steve, the only thing I might add to all the commentary Bob just said is I'd remind you about our inventory positioning that would be already talked about for general merchandise. So we've factored that into the range of outcomes. That doesn't mean that we will be out of stock in general merchandise. It just means that we've tightened up the buys and we've picked the best of the best assortment. So we're ready for Thanksgiving, like Bob talked about. And we're ready for our members for holiday kind of as we roll into December. Steven Zaccone: Okay. The follow-up I have then is on that general merchandise. So when we think about the inventory planning assumptions and maybe just talk about the buying environment, how does that look for the first half of next year, right? Because you made changes to the second half, presumably based on tariff uncertainty. But how does that apply to general merchandise plan as we kind of glance into 2026? Robert Eddy: Yes. Look, it's -- I don't want to get too far over skis and talk about next year. But obviously, the fourth quarter seasonal merchandise was bought in the spring when there was considerably more uncertainty around what the tariff exposures might be and what the consumer's response might be to any increase in prices. Every quarter we go through, we get more and more clarity and we get more information from our members as well. And so we obviously alter our buys accordingly. I guess the other thing I would say is Q4 typically is a higher general merchandise penetration and obviously lower in the first quarter. And so this question becomes a little bit less important as we get into the beginning of the year. Operator: Our next question comes from Mike Baker from D.A. Davidson. Michael Baker: I hate to focus on the short term so myopically. But the guidance, your fourth quarter implied guidance, to me, I'm calculating around 2, 2.5 or something in that range. Correct me if I'm wrong on that, at least at the midpoint of the outlook. But if you are in that range, that's a pretty big pickup on a 2-year basis against the 4.6% last year. So given all the caution you're talking about, can you square that? Or is it more reasonable to think about maybe the low end of the implied fourth quarter guidance, in other words, consistent on a 2-year basis? Robert Eddy: Mike. Look, let's just focus on the fact that we're cautiously optimistic, as I said earlier. We've done a lot of planning, a lot of action around providing our members the right products at the right value. We talked about incremental promotion and building into that. We're certainly where we need to be from a digital perspective. People are loving interacting with our digital properties to get what they need from a convenience perspective. And we just -- we are trying to act within our purpose and take care of the families that depend on us. And that is all those things, right, getting those -- getting the products on the shelf. We're doing a fantastic job doing that in an improved way, putting sharper prices on things, which we, again, had considerable improvements in during the quarter. And really trying to take care of all the different communities within our membership. And we talked a little bit in our prepared remarks about our team members, maybe I'd take one minute to thank those team members out there every day, taking care of our members. They have the hardest job in our company. And guys, I'd really like to thank you for all your efforts. We initiated for the first time in our company's history, a 10% discount for our team members to really say thank you, to acknowledge that it's tough out there for everybody and to help our team members through their holiday season purchasing as well. So I think we have a lot to be proud of. I think we have some momentum coming out of the quarter. The early days of Q4 have been reflective of that momentum. But we understand that there's a lot of road to go throughout the quarter. We're only a couple of weeks in. Next week -- this weekend and next week are huge for the quarter as are the remaining weeks in December. So we feel like we're in a good spot, but it's very, very early. And so that thought process really is what drove us to have the guidance that we put out there. Operator: Our next question comes from Ed Kelly from Wells Fargo. John Park: This is John Park on for Ed. It sounds like the messaging is that you've been investing in price, but I guess merchant margins were flat. So I guess, what are some of the offsets in gross margin that helps you get there? And then anything on Q4 merch margins and how we should think about that? Robert Eddy: John, we certainly have invested -- we widened our price gaps in Q3 considerably with those investments versus competition. So I'd like to say thanks to our merchandising team for making those moves. It's important to our company, important to our members, for sure. And we have many different levers to offset that throughout the business, not just within the margin construct. We will try and be as efficient as possible throughout the business to fund investments in member value. Certainly, some of the offsets that you might think about within the merchandising world would be being more efficient in the distribution centers, trying to be more efficient from a trends perspective, growing our retail media program, which has been growing very, very nicely, the team is doing a great job there. There are many different things that we've tried to do so we can pass more value back to our members, and we'll continue to do that. Operator: [Operator Instructions] Our next question comes from Simeon Gutman from Morgan Stanley. Pedro Gil: This is Pedro Gil on for Simeon. Nice job continuing to grow your digital business, really impressive. Could you comment on the work you're doing in retail media there? And also more broadly, we've heard some of your peers recently announcing partnerships in agentic commerce. Could you give us an update how you're thinking about the AI opportunity in e-commerce? Robert Eddy: Sure. As we've talked about, our digital business is an important part of our strategy. It has been growing by leaps and bounds for years now. So 30% during the quarter, over 60% on a 2-year stack. It is approaching 17% of our sales at this point. We are at a point that, frankly, a few of us didn't think we'd ever get to. And so we have a lot to be proud of there. It all comes on the back of convenience. We have an incredibly talented digital team that builds these capabilities for our members to help them get access to tremendous value in a more convenient way than they otherwise might. Most of our business, as you know, is in what we call BOPIC, Buy Online, Pickup In Club; as well as same-day delivery, as well as ExpressPay, where you check out in the club using your phone. Well over 90% of our total digital sales are fulfilled by our clubs. So we are efficiently building this business. It is certainly a moneymaking opportunity for us. We are really pleased with the way that it's growing. Included in there is our retail media program that you referenced, and I talked a bit about it a few seconds ago. While still small, our team has been growing that quite nicely as well as we improve our website, as we improve the way that we partner out there with our advertisers, the way that we really coordinate between our different properties, whether it's our website or our app. We are coming up with more ways to engage our members and allow our advertising partners to reach our members with compelling values that first and foremost, to help our members but also help us and our advertising partners. So we will continue to invest in that business in the future. Again, it's still small, but is growing quite nicely and allows us to make other investments in member value as we go forward. Everyone talks about AI, we are no different. AI is a big part of our future. It is most notably used in our digital group at this point. And the use cases would not surprise you. They were on the vanguard of using it to make coding more efficient, making testing code more efficient. And they will continue to use AI in consumer-facing avenues as well. And so I'll give you a couple of examples. As we talked about in the prepared remarks, we've got beta-launched AI shopping assistants and are using AI to do predictive shopping lists for folks. Probably the thing that's most well along, however, is partnering AI with the robotics that we have in our stores. We have a robot that roams our stores named Tally. And initially, Tally was just helping us with inventory accuracy and price line accuracy. And now we have taken that much farther where Tally's imagery creates a digital twin of each of our buildings, something that we've never had before because our buildings don't have warehouse management systems. And that has enabled really cool things from an operational perspective where not only are we getting better inventories and better pricing accuracy, but we are efficiently spotting problems for our team members to take care of, we are efficiently generating to-do list for our team members in the clubs find inventory and what needs more inventory, what should they be doing first within the building. We are using it to make help us spot quality issues in our Fresh businesses as well, so we can make sure that our standards there are tiptop every day. We're finding new ways to use Tally and the data that provides every day. I think the thing that's been most effective so far has been using those digital twins to predict the most efficient pick path for our team members to pick orders for BOPIC or curbside or same day, where they are about 40% more efficient today than they were before. So we'll continue to build on the use of AI. We'll continue to focus on long-term investments that really will allow us to continue our mission, which is to offer our folks the best products at the best prices. Probably the next thing up from a robotics and AI perspective will be our automated distribution center in Ohio that will go live next year. That will be when it gets going far more efficient than a traditional distribution center and will operate almost entirely in a robotic fashion. So it will be fun to see that. I've been out there to see it recently, and I can't wait to see it with all the machinery going in there to see how it works. But it's all in the same spirit of providing even greater value for our members. Laura Felice: Pedro, I'd just add all that commentary that Bob just said about Tally and the robotics we have in our club, there is a closed tie to that with the work that our planning and allocation teams are doing that we already spoke about in our prepared remarks. And that is producing our in-stock levels that have improved kind of year-over-year. So there is a tie beyond some of the digital efforts into how we're putting product on our shelves and how our teams internally are using the data from Tally as well. Pedro Gil: Awesome. Fantastic. And as a follow-up, if I could ask you, if you could comment on the competitive environment. You had a nice improvement in merch margin in the first half, a little more even this quarter. To the extent that you can comment, and I totally get it, it's still early; how should we think about the level of investments next year? Are there any particular areas within grocery or gen merch that you're looking to prioritize? Robert Eddy: Look, I don't want to talk too much about next year, but I would just echo the comments that I've already made around the fact that our job is to provide our members great value every day. We've made considerable investments all year in doing so and have been pretty creative to find ways to fund it, having the merch margin results that we had in Q3, while making the investments that we made was a good result. I would anticipate further investment going forward. As the competitive environment out there is, I think, consistent, but it's consistently competitive, and we need to continue to do our jobs to reward our members for their faith in us and the membership fees that they pay. So we will continue to try and ride that balance between margin and value, but we will always err on the side of value to try and operate the business for the long term. Operator: [Operator Instructions] Our next question comes from Chuck Grom from Gordon Haskett. Charles Grom: On the margin front, just to move down the P&L a little bit, your SG&A per square foot levels have been really tight, which is good. But your peers are up a lot, suggesting maybe some investment in technology and other areas. So I guess my question is, how sustainable do you think maintaining that SG&A per square foot at that level over the next couple of years, particularly as you move into Texas? Robert Eddy: Yes, it's a good question, Chuck. Our teams have done a good job over time being very efficient with our buildings, making sure that, that they're in good shape. They're in far better shape today than they were 5 years ago. With that said, we need to continue to do that and maybe even accelerate it. I think one of the things that we're seeing out there is our competitors getting sharper with their boxes. And so we will have to continue to do that, not just because of the competitive environment, but we want to show our members the best box we can every day. And so I would imagine we'll spend some capital going forward, remodeling our boxes. We will obviously continue to spend into our new club pipeline as well. And we'll do that as efficiently as we can, but obviously, with an eye for the long term. William Werner: Chuck, it's Bill. I'll just tack on to that as well. In addition to our existing clubs for the first time ever, we've really started to build a relocation program for some of our older clubs as well. So we had great success with our recent relocation in Mechanicsburg, PA. We announced this morning that we're going to relocate Rotterdam next year. And so it's not just an eye to our existing clubs, but also to the long-term future of these strong markets where we may have buildings out a little bit on the older side. We're taking the opportunity to invest into the future there as well. Charles Grom: Got you. Great. And then on general merchandise, right, like up 1.8% on the stacks much better than front half of the year, even with limiting inventory. You talked a little bit about the category improvement. I guess what do you think it's going to take to get home and seasonal to catch up to CE and apparel and other areas? And then I guess anything that you guys are excited about as we walk stores over the next couple of months into the holidays? Robert Eddy: Yes, sure. Maybe I'll start, and you guys can pick up. Look, I think we've -- we've done some great things from a general merchandise perspective. As we talked about, we had a strong showing in Q3 from a consumer electronics perspective and from an apparel perspective. Consumer electronics has been a hallmark of GM for a while. It's always been a pretty good business for us, and it gets better. We have very talented merchants in that group. Our apparel team has done a great job over the past few years really making sure that we simplify our assortment and bring in better brands, put great value out in front of our members every day. We need to continue to do those things, right? We might need to simplify our assortment a bit more. We need to continue to put great brands out there and put fantastic values on there as well. We need to apply those same lessons to the rest of the business. And we are actively at work on those things. We've seen some green shoots in previous quarters, we've talked about those with you like toys and some of our gifting in previous quarters. I like our toy assortment this year as well. And I'm excited about the way our gifting looks in the front of our clubs as well. But we need to have more sustained transformation in home and then seasonal going forward. These are probably the toughest categories, particularly the seasonal categories, maybe in the building. But certainly, among the GM categories, these are really tough categories. You need to be right on trend, you need to be right on style and color, on price point, all sorts of different things. And while we've made strides, we're not done. We're not satisfied with where we are. We need to continue to turn the crank and get better going forward. So we were under no illusions that renovating general merchandise would be easy or short in tenure. We've had nice success in the past, and we need to keep investing in that business because it is such an important part of the wholesale club model, where provides that treasure hunt, that emotional connection, those cool wow items that are so important to driving incremental trips. And quite honestly, that question around membership renewal is not only tightly linked with the grocery business, but it's really tightly linked with our general merchandise business when you can have more opportunity to save your entire membership fee in one purchase rather than stacking up just good values on smaller ring items. You can save a couple of hundred bucks on a television or a mattress or a great seasonal item. That becomes a really important part of our overall long-term growth of our company. So let me see if the guys want to file on, no? All right? So we're happy with our GM so far. We've got to get better and we'll continue to work at it. Operator: Our next question comes from Rupesh Parikh from Oppenheimer. Rupesh Parikh: Just going back to your commentary about 2025 clubs, the membership count is 25% ahead of plan. What do you think is contributing to that significant outperformance? William Werner: Rupesh, it's Bill. I always come back to the success with the new club program comes back to the culture that the team has built. I think I've mentioned this a couple of times on previous calls that everyone that has evolved within new club program internally is fully engaged and fully bought in and want to see us be successful. So we started this program way back in 2016 and the reps that we've built along the way. We talked about the goal of making the next opening, the best opening in the history of the company. Opening a new club where you have to build up, especially in the new market, membership base entirely from scratch is not easy to do, and it takes a lot of practice and a lot of learnings to do it right. And we're executing at a higher level than we've ever executed. And as we think about going into the Dallas-Fort Worth market next year as well as all the other markets, a market like Foley, Alabama that we announced this morning is a really cool, unique market, and we're going to be really excited to be there. And we wouldn't be able to do that, we wouldn't have the confidence to do that without all the success that we've built up to this point. So like I said, we're really pleased with what we've done here in 2025. It really has been probably the best class that we've ever opened in at least as far as I've been here. And it gives us a lot of confidence going forward. So more to come, but excited about what we've accomplished. Operator: Thank you very much. This marks the end of the Q&A session. I'd like to hand back to Bob Eddy for any closing remarks. Robert Eddy: Thanks, Carl. Thanks, everybody, for your attention this morning, for your thoughtful questions, for your interaction, your support of our company. I wish you all a happy Thanksgiving, and we'll talk to you at the end of the fourth quarter. Thanks so much. Operator: As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.